Remember the Great Recession of 2008?
Mortgage backed securities, ended up being underwater when housing prices collapsed?
Could never happen again, right?
Uhh, low number of fast, my friend.
Student loan debts are being packaged into securities, much like mortgage debt was.
Shannon Achilmabe writes about this for the Above the Law website.
Here is a good, concise explanation of how SLABS work at a Business Insider article:
SLABS involve student loans that have been refinanced and packaged towards a large offering.?That offering is cut into pieces and sold to institutional investors, like hedge funds and pension investments.
For years, SLABS are advertised as a strong investment vehicle. Why? Since the majority of the borrowers have strong credit. Another big selling feature for investors: Unlike normal credit card debt, student loans are almost impossible to discharge in bankruptcy.
According to Business Insider, in 2015, SoFi already has placed $700 million in SLABS. This company expects that figure could rise to $2 billion after 2015. Quarterly SLABS are expected to commence in 2016 and SoFi CEO Mike Cagney says SoFi will provide $4 billion in asset-backed securitizations in 2016. During the past year, CommonBond executed the securitization of $100 million of education loans.
Of course, a free market works this way:? better credit risks pay lower mortgage rates.
And private lenders are happy to produce loans that will be repaid.
So, what the government has done, again, similar to mortgages, is lend money to anyone.
Only now, the individual lenders are cherry picking the nice loans, the ones likely to be repaid.
And leaving the us govenment with hundreds and hundreds of millions of bad loans.
What may go wrong?
And when the government bails itself out, because of bad loans, the taxpayer has got the bill.
One of the answers could be to let the free market handle student education loans.
Not much chance of that happening.
College tuition costs are another bubble, just like properties, that the government inflated with artificially straightforward to get student loans, as they did devoid of doc mortgages in the early point about this millenium.
Check out what the presidential candidates have to say on this issue before you vote.