Whose fault is the big student loan bubble?
by David Atkins
It's not quite as big as the housing bubble, the causes are somewhat different, and it's less likely to collapse. But still, the parallels between the housing bubble and the growing student loan bubble are more than a little disconcerting:
Student loans are souring at a growing rate—and investors can't seem to get enough.Most student loan debt is backed up explicitly by the government. But about 10% of it goes through Sallie Mae, a private lender. And securities investments in these loans. Either way, the demand on Wall Street for securities on these loans is growing fast:
SLM Corp., SLM +4.22% the largest U.S. student lender, last week sold $1.1 billion of securities backed by private student loans. Demand for the riskiest bunch—those that will lose money first if the loans go bad—was 15 times greater than the supply, people familiar with the deal said.
Meanwhile, SecondMarket Holdings Inc., a New York-based trading platform best known for private stock shares, said it would roll out on Monday a platform to allow lenders to issue student-loan securities directly to investors.
"The catalyst for this new suite of services is investor demand," said Barry Silbert, founder and chief executive of SecondMarket.
But while investors are piling into student loans, borrowers are falling behind on their payments at a faster clip. According to a Thursday report by the Federal Reserve Bank of New York, 31% of people paying back student loans were at least 90 days late at the end of the fourth quarter, up from 24% in the fourth quarter of 2008. The figures include federal student loans and those issued by private lenders.
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.
Yields on securities backed by student loans, which move in the opposite direction of prices, have been plunging. The average yield for floating-rate student-loan-backed securities stood at 1.48% on Thursday, down from 2.01% at the end of August, according to Barclays BARC.LN -1.29% . That compares with roughly 0.75% for comparable Treasury securities.Those who believe that the crash of 2008 was a "black swan event" won't even see a problem here. The rest of that this sort of mad rush to securities against loans that probably cannot be repaid is a symptom of the race among those with far too much capital on their hands to find places to park their enormous wads of pocket change, creating big demand for even the riskiest of investments.
This year through February, dealers sold $5.6 billion of student-loan-backed securities, more than triple the figure for the same period in 2012, according to Asset-Backed Alert.
The federal government doesn't bundle new student loans into securities, so investors don't bear the risk of defaults. Dean Maki, chief U.S. economist at Barclays PLC, said higher delinquencies likely would raise the cost of the student-loan program to the government.
Assigning blame for this situation becomes something of a political Rorschach test: one's political theology.
A progressive looks at this situation and sees a host of social ills and policy missteps contributing to it. These begin with lack of affordable access to higher education, but also include a lack of jobs with decent wages available after graduation, an overabundance of liquid capital combined with a culture of greed seeking out ever-greater returns on ever-riskier investments, and a dearth of regulation controlling what kind of investments our too-big-to-fail financial institutions are allowed to take on.
A conservative looks at it and sees the hand of government. A conservative sees a government that funnels too many people toward higher education, ensures the availability of too many educational pathways without secure jobs on the other side of them, and guarantees too many student loans that most students and lenders, they believe, would not take on in purely "free" market.
These two sides are not going to be reconciled, and any set of policies attempting "compromise" between them would lead to worse effects than giving free reign to either one side or the another.
The progressive approach works. It has worked in the past, been shown to work elsewhere in the world, and leads to superior outcomes. But it also requires progressive taxation and regulation to accomplish.
The conservative approach would almost certainly "work" in the sense that the end result would lead to fewer risky investments. Most poor students would never have an opportunity to go to college; most funding apparatuses that support poorer students achieving higher education would disappear or be funded by the least scrupulous of lenders; most liberal arts education would vanish into thin air; and capital investment would go toward higher education that safely served only a wealthier customer base more able to repay loans.
The problem is that that vision of society is certainly callous, and borders on sociopathic. Some would rightly call it evil. It's a vision that assumes that those with money always deserve to have it, and those without don't deserve it and must do whatever it takes to get it. It's a vision that assumes the "free market" is a force of nature to which human beings must adapt or die, rather than an artificial construction designed to serve the needs of the human beings.
These beliefs were not always accepted in polite society because they lead inevitably to the collapse of what we call civilization. They presage a Dickensian banana republic of very poor and very rich, subject to rampant corruption and instability. Unlike those who claim that feminism and marriage equality will lead to civilization collapse, the historical evidence is ample that too much inequality and too little support for the middle class leads inevitably to the loss of broad-based prosperity and democracy.
We are fortunate in that most people don't accept the conservative vision. But for a variety of reasons tied mostly to the short-term self-interest of the wealthy who fund electoral campaigns, as well as the racial and social insecurities of older white men in large sections of the country, the conservative vision has just enough clout to make addressing our challenges utterly impossible through the political process.
The answer to this problem isn't compromise. It's public policy specifically designed to disempower plutocratic privilege and racial prejudice in our body politic. Nothing else will accomplish the goal, because pinning down solutions to this and other problems in our system isn't a question of minor disagreement. It's a question of political theology.
When one of two religions demands massive human sacrifice on the altar of infallible market, its priests have to be disempowered for peace and justice to be established.