I’m certainly not the first person to write about this, and I know I won’t be the last, but our massive student debt bubble is on the verge of bursting.
Unless this crisis is nipped in the bud soon, I don’t see any scenario playing out in which this doesn’t blow up in our faces. I say this, not because the numbers are scary (they are) or because it makes for a catchy headline (it does), but because I genuinely believe it.
And that’s because the student loan market is practically set up to do so.
The leading ladies
At the center of all this is a corporation that, while publicly traded, is also pseudo-connected to the government: Sallie Mae. The nature of this pseudo-connection is the cause of my concern, and to understand that we need to jump back a few decades.
Sallie Mae, short for The Student Loan Marketing Association, was created in 1972 as a government-sponsored enterprise (GSE), meaning that essentially it could function like a private company while being funded by the taxpayers.
Sallie Mae is the largest originator of federally insured student loans in the country. In 2004, Congress terminated Sallie Mae’s relationship with the government, thus making it a fully private company. However, in 2009 the Department of Education elected Sallie Mae to service federal loans on its behalf.
In 2014, Sallie Mae split into two companies – Sallie Mae and Navient – with the latter taking on the servicing and management of the student loan portfolios.
Why do they matter?
After President Trump won election back in November, the stock price of both Sallie Mae and Navient shot way up under the assumption that his presidency meant a loosening of the reigns on student loan lending. While Navient’s stock price has somewhat leveled off, Sallie Mae’s remains roughly 60 percent higher than it was before November 7th.
Just last month, JPMorgan Chase & Co. announced that it would be selling its entire student loan portfolio, valued at $6.9 billion, to Navient, about half of which are federally guaranteed loans. And earlier this month, Zack’s Investment Research upgraded Navient’s stock to a “Buy” rating, signaling confidence in the company’s growth.
Yet, at the same time, the student debt crisis is only getting worse. Total student debt in the nation is somewhere around $1.4 trillion, over 44 million American’s hold student debt and default rates have been climbing for years.
In fact, Moody’s, one of the most prominent rating agencies in the nation, has been downgrading the ranks of student loan backed securities for years because they won’t pay off by their maturity dates. If anything, investors should be running for the hills, not fueling the fire.
So then, why? Why, if so many indicators are pointing to a ballooning issue, is stock in student loan lenders surging and business growing? Why is money being pumped in when we haven’t yet found a solution?
Because solutions don’t pay
When Sallie Mae and Navient both saw their stock shoot up after President Trump’s election, it wasn’t simply because investors saw an opportunity to capitalize on the deregulation of the market. More importantly, they saw the end of one specific measure: the Health Care and Education Reconciliation Act of 2010.
This act included a provision that eliminated the federally guaranteed loan program that allowed Sallie Mae to give out loans that were backed by the taxpayers.
Deregulating the student lending sector would bring back federally guaranteed loans, thus turning Sallie Mae back into a government sponsored enterprise.
In short: Sallie Mae could lend with reckless abandon – capitalizing on the growth in student borrowers without assuming any of the risk when borrowers inevitably default. Confidence in the market isn’t going up because investors see a light at the end of the student debt tunnel, it’s because they know they can make a king’s ransom off of an unregulated and unsustainable market.
If this sounds eerily familiar to the 2008 housing crisis, that’s because it is. Only in this case we have Sallie Mae instead of Fannie Mae (we’re really creative with the nicknames).
Navient, on the other hand, has been wrapped up in an ugly set of lawsuits since April which claim both they and Sallie Mae were practicing predatory lending tactics that mirror those of the mortgage lenders in the mid-2000’s.
The suits argue that the companies were baiting borrowers who had no means by which to pay back their loans. The more loans the companies doled out, the more federally guaranteed loans they were given, boosting earnings like crazy.
Hell, investors and fund managers have even been betting against the student debt market, which if you’ve seen The Big Short, is a pretty good indicator that shit’s gonna go way south before it improves.
So, what happens now?
If the bubble does indeed burst, things would generally follow this path:
The markets would tumble, causing your dollar to be worth next to nothing and your loan interest rates to soar. Students and their families with unpaid federally-backed loans (i.e. from Sallie Mae) would be forced to default while any other student borrowers would have to file for bankruptcy. Either scenario would tank their credit and take years – if ever – to recover from financially. The financial institutions with student loans on their books would face two options: file for bankruptcy or, if they are deemed too important, mercifully get bailed out by you, the taxpayer. Public debt would go through the roof, which would mean some combination of increased taxes, decreased government spending, a terrible job market and little-to-no financial security.
If you didn’t already, it might be a good idea to consider the student debt crisis as priority number one on the country’s “To Do” list. Honestly though, it might already be too late.
Have something to add to this story? Comment below or join the discussion on Facebook.
Header image: Getty