Courtesy of Karl Denninger, The Tickerguy (Right AGAIN)
(They just keep coming today, don’t they?)
Mr. Ades has become an expert in the $242 billion market for bonds backed by bundles of student loans, delivering consistently strong returns by trading hundreds of millions of dollars worth of the debt over the past four years. "We know all these deals inside out and we know their default rates," he said.
But when it comes to the loans banks made to students who graduated in 2010 and 2011, the 31-year-old investor is steering well clear, "because we can’t quantify the risk," he said.
….
Historically, investors have assumed 25% to 30% of student loans bundled into their bonds will default but they are baking in 30% to 40% default rates for loans owed by the current crop of graduates, said Chris Haid, a director in asset backed trading at Barclays Capital. Even those assumptions are a best guess and defaults could ultimately go higher if unemployment rises, Mr. Haid said.
Gee, this is nice. So why are these loans still being made when the investors know they’re crap?
This is also the problem with college cost when you get down to it: Cheap money means too many buyers chasing a given resource, which in turn means price rises. And rise it sure as hell has! Then the lenders look for a bagholder (read that as you, the taxpayer) to eat their loss on a loan they knew was bad when they made it.
This process would normally choke itself off, as it would quickly reach the point where interest rates would have to go up a lot in order to cover the risk. That in turn would hold down college costs; that which nobody can pay won’t be sold at that price, obviously. And clearly education can be provided at a much-lower cost; it was in the 1950s, 60s, 70s and 80s.
If you don’t see the exact parallel the housing bubble scam of the 2000s you’re not paying attention.
There is only one solution to this mess:
- Get the government out of it. Entirely. No lending of any sort with government involvement.
- Return student loans to being dischargable in bankruptcy. Now you won’t have a 30% or higher default rate as nobody will lend with that sort of risk! So you’ll have caps placed on what you can borrow and supervision of progress (grades, hours and classes) and will get cut off if you don’t stay on track.
That’s the solution to both problems: Sky-high default rates and college cost escalation.
Any politician that does not promote this and make it happen is lying about wanting to address the problem. Instead they are looking for ways to rob you (if you’re young) or your kids (if you have college-age or college-bound kids.)
Hold their feet to the fire and don’t let it happen.
