Student loan debt. Harsh terms. Wall Street securitization

Student loan debt

The harsh terms of student loan debt (it can’t be discharged by bankruptcy and their Mafia-like ways of garnishing salaries) are exactly why Wall Street loves them. The loans get sliced and diced into securities and sold to investors. Just like happened with mortgages in 2007 and that ended so well, didn’t it? Even better for Wall Street, the loans are guaranteed by the government. Universities love this too, because they have no skin in the game. They can charge exorbitant tuition, and get paid by loans held by someone else.

The results of course can be devastating to those with loans.

A highly responsible friend has worked steadily since 2001 when she graduated from college. Her first year monthly salary was less than the loan payment so it defaulted. She pays 25% interest and 18 yrs later is paying down interest and not principal. And they refuse to deal.

Another friend was untreated bipolar during college and ran up too much college loan debt. Yes, it was a mistake but she’s in her fifties now and still paying it off because it defaulted too. She couldn’t renegotiate either, however did manage to get a private loan to pay it off. If she hadn’t she would have been making payments when she retired.

Warren and Sanders have competing student loan plans.

Elizabeth Warren: For those earning lass than $100,000 their first $50,000 in student loan debt would be paid off paid off by a new tax on the ultra wealthy.

Bernie Sanders: All student loan debt for those earning less than $250,000 a year would be paid off with a tax on Wall Street transactions.

Both plans want to make public undergraduate college free. But how will that be done? Also, IMO, Bernie is tilting at windmills if he thinks Wall Street will let that happen.

The real problem here is private college is absurdly expensive now, with an average of $46,000 a year, with public colleges at $25,000 for in-state and $40,000 for out-of-state.

Wall Street just loves their SLABS

In the case of student loan asset-backed securities (SLABS), outstanding student loans are grouped together into pools, which investors purchase and get a return when borrowers make their loan payments.

This is very similar to the mortgage-backed securities that led to the mortgage crisis of 2008, where securities based on pools of mortgages collapsed when the borrowers began defaulting on their mortgage payments

On the surface, SLABS seem pretty low risk: borrowers make monthly loan payments and student loans are almost impossible to discharge in bankruptcy proceedings. However, a great majority of student loans are backed by the federal government. Government-backed loans almost never require a credit check or a cosigner to receive loans.

Much like the subprime and predatory lending practices that occurred during the mortgage crisis, many of the student loans backing these securities have been given to borrowers with no assessment of whether or not there is an ability to repay the loans.