With student debt at $1.3 trillion, the number of students defaulting on college loan payments is raising concerns that banks may not be able to lend more money and will be exposed to more financial risk. Federal lending programs were designed to let borrowers scale back repayments when they are not making enough money to meet their payments. However, the number of people defaulting is causing the stream of money to slow and shrinking the market for bonds backed by this federal debt. Investors concerned about being paid back on the bonds they currently own are reluctant to buy new bonds.
Credit rating firms Moody’s and Fitch have put over $36 billion worth of student loan bonds on notice for a potential downgrade. They say it is “increasingly likely” that borrowers won’t be able to pay their loans off by the original dates and the bonds backed by those loans could therefore end up in default. US Bancorp last week abandoned an effort to sell $3 billion worth of student loans due to low bids. It is now planning to take a write-down of $55-60 million, according to the Wall Street Journal.
What will the effects of this be? WSJ says it could have a knock-on effect, causing banks to be reluctant to make other types of loans, but that the risk of default is low. Securitization expert Mark Adelson says “the risk isn’t one of ultimate losses for investors but rather delays in payment that go past the maturity date of the bond.” As more and more students go to university and the job market becomes more crowded with graduates, this problem seems unlikely to go away.
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