Opinion

The Great Debate

Student loan bubble babble

By Chadwick Matlin
March 7, 2013

The New York Federal Reserve, always interested in brightening our days, released a slideshow last week on student loans. It had little good news, but it did offer a reminder that in 2013 fewer people are indebted to the American Dream. Instead, they’re in debt because of it.

College, we’ve long been told, is the great equalizer. (And, despite the doomsayers, there’s reason to think it still is.) But increasingly, people are graduating in vastly different economic situations. More than 40 percent of 25-year-olds now have student debt, and 35 percent of twentysomethings are more than 90 days delinquent on loans that are being repaid. All of this comes as the average income for a 25- to 34-year-old with a bachelor’s degree is the lowest it’s been in years, down about $10,000 since 2000.

All of this makes people worried. How are that many people going to pay back that much debt while also paying for all the other stuff good, consumerist Americans buy? And if they don’t pay it back, what will that do to the economy? And while they’re (not) paying it back, what happens if they curtail taking out loans for cars, houses, etc.?

This week, the Fed’s delinquency stats found a fitting companion in a Wall Street Journal article about Sallie Mae’s student loan asset-backed securities. (The securities are called SLABS, in a brilliant bit of bizspeak that turns the products into something out of a Kubrick movie.) The Journal’s piece uses a $1.1 billion sale of some of Sallie Mae’s riskiest SLABS to imply that boom times might be back in the student loan market. “Investors’ hunger for risky loans shows the lengths they are willing to go to generate returns in a period when interest rates are hovering near record lows.”

These two data points have led to the predictable grousing over whether or not a new bubble is coming – if it’s not already here – and just how catastrophic it might be. Gawker wrote a piece slugged, “Student Debt Is Perfectly Following the Financial Meltdown Script.”The Atlantic demurred: “Don’t Panic: Wall St.’s Going Crazy for Student Loans, but This Is No Bubble.”

The concern is that banks will buy up too many student loan securities the same way they did in the mortgage crisis just a few years ago. The rebuttal is that mass default is less likely to happen because so few student loans are securitized, and the vast majority are backed by the government.

Leaving aside the egoistic battle to be the one who divines the whereabouts of an economic disaster that may or may not exist, let’s return to what we know: Wall Street isn’t going nearly as crazy for SLABS as they have in the past. At least not yet. I asked Thomson Reuters’ crackerjack data team to pull 20 years’ worth of data on SLABS auctions. This is what two decades of student loan securities looks like:

Investors aren’t even close to the kind of SLABS purchasing they were doing before the financial crisis, when $135 billion worth of SLABS moved in 2006 and 2007. Last year, SLABS only generated $25 billion in proceeds.

Lots of money, but far from the trillions of dollars of mortgage-backed securities. That uptick at the end of the graph – and the Journal’s reporting on Sallie Mae’s risky SLABS sale – may very well mean that the market is going to get frothier. It doesn’t mean the bubble is here yet, at least compared to the muted suds of yesteryear.

Far more worrisome than a student loan bubble is the student loan anvil. The macro economy may be safe from overleveraged banks, but are individual graduates safe from their overleveraged bills? They may find themselves too weighed down to drift upwards into the middle class, where they can spend and help fuel whatever bubble may come next.

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