by HippetyHoppety1234
TL;DR: Student loans are getting out of control and the average American is struggling to pay back. Once Biden’s student loan pause stops the debt market might spiral out of control.
Okay Ill make my thesis pretty clear from the start:
Americans aren’t able to pay their student loans back.
A pretty simple thesis right? In my opinion, yes, it’s a lot simpler than mortgages.
The subprime mortgage crash of 2008 was caused by, in short terms, people not being able to afford paying their mortgages after their teaser rates expired.
Theres a myriad of other ways to explain it and thats just what I think. People were getting loans they obviously couldn’t pay.
They ignored the rates in the long term because they were being blinded with the misconceptions that they could always refinance their terms. This was obviously wrong, but the issuers didn’t give a shit, because it made them rich. So they kept on dishing out loans to people even with shitty credit scores.
This time however Americas debt problems have taken a different turn. The student loan market is very different from the mortgage market. Obviously the market is smaller, but student loans are still the second largest consumer debt with a market of 1.6 trillion USD. The crazy thing is that the average debt incurred by students to fund their seminary education is $33,000. While the student loans cause less debt than mortgages they also often have worse terms. Issuers tend to focus on the principal amount owed while ignoring the interest that accumulates. This can really mess some people up when in their later years of college they realise that they might need to take an extra semester to pass. Student debt can also set a stopper on getting a mortgage. If you spend say 10 or 15% on your student debt, getting a mortgage where you pay say 35% can be impossible. Student debt is also harder to refinance as fewer private issuers include refinancing in their terms, and with federal loans it forfeits key consumer protections.
If you go bankrupt you cant discharge your loan without proving that your issuer is causing you “undue hardship”. In mortgages all of these things are much easier to do and the debt market is obviously much more regulated.
So far I have only talked about how student loans are rigged against the average American. However one of the most pressing issues are the unjust rising costs of college. Ill let this chart speak for itself: i.huffpost.com/gen/1192706/images/o-COLLEGE-COSTS-facebook.jpg
Biden recently extended the Student debt forgiveness act. This is obviously bearish. This can be compared to the teaser rates running out and people not being able to afford their payments. As people haven’t had to pay student loans in a while now, it is fair to say the part of their income that went to student debt has gone to other things. Maybe restaurants, maybe a new car with more debt etc… This basically means that people are going to be struggling to find money to repay their loans with.
So, how can we profit off of this? I would say credit default swaps. However i dont really know the credit derivatives market well and maybe someone in the comments has a better idea?
I dont really know how this is going to play out on the markets. But its going to be interesting.
TL;DR at the top.