Student loans: Only investors seem to want them

Nearly everyone I know has student loan debt. Those who don’t are lucky and already paid it off. I can maybe name the people on one hand who have not owed money for the privilege of earning a degree.

It seems that now investors are also more willing than ever to get in on the act. The Wall Street Journal had this story on Monday:

 Student loans are souring at a growing rate—and investors can’t seem to get enough.

SLM Corp., the largest U.S. student lender, last week sold $1.1 billion of securities backed by private student loans. Demand for the riskiest bunch—those that will lose money first if the loans go bad—was 15 times greater than the supply, people familiar with the deal said.

Meanwhile, SecondMarket Holdings Inc., a New York-based trading platform best known for private stock shares, said it would roll out on Monday a platform to allow lenders to issue student-loan securities directly to investors.

“The catalyst for this new suite of services is investor demand,” said Barry Silbert, founder and chief executive of SecondMarket.

But while investors are piling into student loans, borrowers are falling behind on their payments at a faster clip. According to a Thursday 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. The figures include federal student loans and those issued by private lenders.

Investors’ hunger for risky loans shows the lengths they are willing to go to generate returns in a period when interest rates are hovering near record lows.

So now investors can cut out the middle man – the bankers – and put their money into the student loan market directly. As Businessweek points out, the opportunities are growing:

that 35 percent of those of us under age 30 simply won’t—or can’t—make their loan payments anymore, according to a new report from the Federal Reserve Bank of New York.

Since 2004, educational debt has nearly tripled, to $966 billion, surpassing credit-card debt, auto loans, and home equity lines of credit to take second place behind mortgage debt, with a total balance moving steadily toward $1 trillion. Even through the recession, student debt showed no signs of stopping.

“Student loan debt is the only kind of household debt that continued to rise during the Great Recession and has now the second-largest balance after mortgage debt,” write Donghoon Lee, an economist at the New York Fed, according to Bloomberg News. “With delinquent student debt, mortgage origination is very difficult. The mortgage origination gap across the size of student debt has declined between 2005 and 2012.”

Much has been written about the deferred purchasing as people pay off loans. But with investors demanding more of the private debt, will that push lenders to offer more loans? One thing is for sure, the government sequester is going to hurt those looking for federal funding, according to ABC News.

While Republicans and Democrats fight over how to deal with the automatic budget cuts that start tomorrow, the sequester will almost certainly mean cuts to programs for college students.

That includes cuts to some federal work-study programs and reductions in payments to millions of student loan borrowers, although the exact detail and timeline remain unclear.

During the White House briefing Wednesday, Secretary of Education Arne Duncan warned of the dire effects sequestration could have on federal higher education funding.

 “That ($86 million cut) would mean for the fall as many as 70,000 students would lose access to grants and to work-study opportunities,” Duncan said during the briefing. “And if young people lose access to grants and lose access to work study, my fear … is many of them would not be able to enroll in college, would not be able to go back. And, again, do we want a less-educated workforce?”

Though funding for federal Pell Grants are protected from sequestration, funding for federal work study grants would be cut by $49 million and supplemental educational opportunity grants by $37 million, according to the Department of Education.

That’s a lot more people turning to the private sector, making the timing of the SecondMarket offering perfect for investors.