We have to add one more debt crisis, that few talk about, and add it to the troubles in CRE, auto ABS, zombie debt, hold-to-maturity Treasuries/MBS, and personal loans.
The one we have to add to the long list had a chance to be saved until the Supreme Court decided to axe the rescue package. If you are wondering what I am talking about, I will give you a clue. It’s a 1.7 trillion debt that affects millions of Americans and more investors than you think.
I am talking about student debt and the Supreme Court just ruled against the Biden administration’s claimed authority to cancel or reduce student loan debt. The plan was to forgive $400 billion, which would have canceled up to $20,000 in federal student loans for 43 million Americans. What they forgot to tell you is that it was also a bailout for investors and banks that loaded up on SLABS in the last decade.
What are SLABS? They are the MBS of student loans aka Student Loan Asset Backed Securities. Yes, student debts have been securitized and sold to banks and investors like everything else we securitize and sell for profit.
Private and federally insured student loans like MBS are bundled, rated, and sold in tranches to institutional investors as bonds. SLABS are non-collateralized (but some are government-guaranteed) student loan debt. Think of them like MBS with some with government guarantees and some not guaranteed bundling prime and subprime borrowers together with a shady rating system reminiscent of the subprime CDO mortgage market pre-GFC but 0 with collateral aka no house to foreclose.
They are sold as low-risk securities to investors with high yields that are rising. Sounds great for investors but the problem is that the delinquency rate is rising and is already back to pre-pandemic levels when we were already talking about a crisis and a potential 20 to 40% of borrowers unable to pay.
The Biden administration might have wanted to bail out students but unseen to the public it would have also bailed out investors too. Now that’s dead thanks to the Supreme Court. The chances of Congress doing anything about it before 2025 are slim to none and even after the chances are small to slim. So what happens next?
Defaults will continue to rise. Unlike other debts like a mortgage, it’s nearly impossible to escape it. You can’t declare bankruptcy and walk away from the debt as the future earnings of borrowers are the collateral. The government will come in and force payments by using future tax returns and wage garnishing.
This might be the straw that breaks the camel’s back as no one can walk away from that debt. Some might have to give up their cars and homes to pay for the debt that has been sold to investors and banks that are loaded up on 1.5T of bundled-up prime and subprime loans.
It’s a mess 20 years in the making like everything else.