Will Student Loans Bring About the Next Financial Crisis?
The undergraduate readership might be all too familiar with the topic of students loans. According to Student Loan Hero, nearly 70% of all undergraduate students in the United States have taken out a loan in order to attend college, thus, a reality in which more and more students are bound to large financial burdens is inevitable. Yet, beyond the intuitive effects on student borrowers, the effect of student debt — specifically, securitization of the debt — on the economy is not understood as well.
According to the Northeastern University Law Review Forum, “the securitization of student loans began in the early 1990s, after the passing … of the Investment Company Act of 1940, [which] essentially removed the regulatory constraints and costly registration requirements that previously existed for sellers of asset-backed securities.” Because regulatory constraints were reduced, student loans were enabled to be repackaged and pooled with other loans (thus creating a “product”) and sold to investors. These student loan asset-backed securities, otherwise known as SLABS, provide investors with cash flow when students make payments on the loan and interest. According to Forbes Magazine, the student loan debt currently figures at $1.52 trillion dollars, behind only mortgage debt.
Problematically, the risk in investing in unregulated securities echoes 2008 financial crisis, only instead of mortgage-backed securities, we have SLABS. The parallels between student debt and mortgages just a decade later make SLABS an important figure to keep in mind. After all, people invest in education with the goal of being able to earn more in the future and pay back their debt. The same mindset was applied to purchasing homes in 2008, a time when expert economists and investors were not able to fathom a situation where housing prices would actually fall. Because of this, more and more people bought homes, obtaining mortgages to do so. The lack of regulation and poor oversight among mortgage companies and originators exacerbated the housing frenzy, making loans to those who might not have been able to pay them off.
In a similar fashion, more students have been taking on student debt, hoping that increased education will boost their future earnings, helping them pay off the debt. With tuition rising each year, students not only have a heavier debt burden also must deal with slowing wages and underemployment among college students. Indeed, Forbes Magazine reports that the cost of a four-year undergraduate degree increased almost 8 times faster than wages in 2018. Unsurprisingly, right now, 11.5% of student loans are delinquent 90 days or more.
The fears that student loans will precipitate the next financial crisis is not unfounded, but in recognizing the historical parallels, it is important that we pay attention to SLABS and focus on efforts to reduce this bubble within student debt. Making sure that higher education is affordable should be a priority that requires leadership not only among policymakers and educational advocates, but also among public and private universities. After all, reducing the burden of student debt not only has positive implications for economic growth and productivity, but can also help alleviate potential risks for the economy.