Why Is The Student Loan Market Collapsing

The student loan debt in the United States has ballooned to nearly $1.7 trillion, affecting about 45 million borrowers. This surge is exacerbated by a 28% rise in tuition and fees at public institutions over the past decade, even after adjusting for inflation. This alarming increase underpins a broader concern often referred to as the Student Loan Crisis. The crisis is not just a burden on individuals, but poses potential risks to the financial system, similar to those seen in the subprime mortgage crisis of 2008.

Central to this systemic risk are Student Loan Asset-Backed Securities (SLABS). These securities, backed by student loans, are sold to investors. SLABS resemble the infamous subprime mortgages that triggered the 2008 crisis, raising fears that defaults could similarly impact investors and perhaps catalyze a financial downturn. This mechanism involves securitizing loans into negotiable securities which are sold on Wall Street, a practice that has expanded to encompass $92 trillion in assets, including student loans.

The process of securitization has grown sophisticated over the years. It typically begins with student loans, either federal or private, which are then grouped into diversified portfolios to mitigate individual risks. These are placed into special trusts, and securities are issued, rated, and sold to institutional investors. Payments from borrowers sustain this cycle, with significant involvement from major banks like Bank of America and JPMorgan.

One notable feature of the student loan securities market is the prevalence of loans originating from the Federal Family Education Loan Program (FFELP), which account for 56% of today's SLABS. Loans under FFELP were guaranteed by the government, thus previously offering a safety net for investors against defaults. However, newer student loans lack this federal guarantee, amplifying the risk of a collapse in the SLABS market should widespread defaults occur.

The impact of the student loan burden is profound on the job market and individual financial stability. For instance, dental graduates carry an average debt of $285,184, and law students can expect around $212,576. The typical monthly repayment is around $400, underscoring the significant financial strain on graduates. Additionally, besides student loans, Americans employ other forms of financing such as credit cards and home equity loans to manage education costs, indicating a complex web of financial dependency and risk.

This complex and opaque financial structure surrounding SLABS, coupled with the lack of transparency about the real risk of defaults, poses significant challenges. There is a crucial need for more education and transparency in the SLABS market to ensure its stability and integrity. As the student loan market continues to evolve amidst these challenges, it becomes imperative to maintain a healthy and efficient market that supports the financing of higher education in the United States while safeguarding financial systems and individual financial futures.

CHAPTERS:
0:00 Student Loan Crisis
2:05 Student Loans Asset Backed Securities
4:00 How Student Loan Crisis Could Lead A Recession
6:00 Americans Struggling With Student Debt


Produced by: Samantha Harvey
Edited by: Jacob Smith
Animation: Charlotte Brown
Additional Footage: Getty Images

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