Uh-oh. It’s beginning to feel just a little bit like the 2006 housing bubble that burst. This time it's not housing that is growing uncontrollably, it’s student loan debt.
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Last week I told you about how students have more debt than ever and how they just can't seem to pay it down.
According to a 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. That’s astonishing and it wouldn't be possible except for the fact that investors are desperate for higher rates of return in this market and student loans are giving them that.
Student loans are packaged almost exactly like mortgages (before the crash), and sold to investors. These days, investors are hungry for risky loans because with rates so low it's difficult to find higher yields. The highest yields are found on the riskiest loans.
Last week, the largest U.S. student lender, Sallie Mae, sold $1.1 billion worth of securities backed by student loan debt. Demand was the highest for the riskiest of the bunch, those that will lose money first if the loans go bad. In fact, it was 15 times greater than the supply. So, what do you think lenders do when they see it? They create more of it.
That is exactly what happened during the housing crisis. Professional investors demanded packaged mortgage debt, which ultimately led to booming loans to people who simply couldn’t afford them. A ninja loan, also known as a subprime loan, is a loan to people with no income or jobs, and with this kind of loan you could decide to pay only interest and no principle.
That didn't work out so well for Main Street or Wall Street. It's my fear this won't work out well either. Students are graduating with average debt of $27,000 and colleges continue to raise prices.