Are SLABS Driving College Attendance?
Ok, SLABS makes me think of St. Louis style baby back ribs which are delicious. They are something entirely different when you are talking in economic terms. SLABS means Student Loan Asset Backed Securities – a mouthful for sure and not as tasty as the first kind. I have been trying to figure out why everyone from Bill Gates on down thinks that having as many people going to college as possible is not only a good thing, but somehow absolutely necessary for our country’s economic future, and I think the answer may be SLABS. Yes it comes down to money, but it is not the direct line of profit to some Wall Street tycoons that you may be picturing. SLABS back US bonds so the greatest beneficiary is the US government.
This chart from the Securities Industry and Financial Markets Association shows how much mortgages and asset backed securities make up the underlying securities for the US bond market. US treasuries are the next closest category which rely on the federal reserve bank to remain viable.
You can see that between 2007 and 2011, the value of outstanding asset-backed and mortgage-related securities exceeds that of every other category. Within that category, collateralized debt obligations (CDO’s) and home equity-backed securities account for 63.3% of outstanding asset-backed securities while student loans only account for 13.7%.
But we are in a situation where the federal government now controls 95+% of the student loan business. They are poised, according to the CBO, to collect about $127 billion in profit over the next ten years from this business. Meanwhile student loan debt has moved from $90 billion in 1999 to almost $1 trillion last year. The projection is that it will grow to $2 trillion in just another six years. The average student owes $24,000. I expect that the percentage of student loan debt in that chart is going to increase rather rapidly as a sluggish economic recovery will continue to depress consumer spending and home prices, the two things that account for most of the large blue band now. Pushing up to 60% of high school graduates into college as Bill Gates has envisioned, will only further inflate the pool of available SLABS, helping a federal government that doesn’t know how to say no to a spending program.
Graduates are delaying full fledged living (starting a family, buying a home) because of the monkey of student debt on their backs. That means that they won’t have homes from which to draw equity loans and they will be spending their money to make large student loan debt payments instead of purchasing consumer products. This will further slog down the US economy which needs consumers, for good or ill, to survive and improve.
A lot of the money the government will get will come from graduate student loans because the expectation is that those people will enter professions that will have a higher rate of return (they will earn more) than the average college student. One look at this frightening chart from the National Center for Education Statistics shows that this is smart investing on the government’s part, but maybe not so much on the typical undergraduate’s part.
Interest on these loans is rising too. The rate for an undergraduate Stafford loan just jumped 0.8% going from its current 3.86% fixed rate to a 4.66% fixed rate for loans disbursed July 1, 2014 until June 30, 2015. (source Forbes) Only action by Congress placed some limit on this run away train. The interest rate for undergraduate Stafford loans was capped at 8.25% , and the cap for graduate Stafford loans was placed at 9.5%. Notice that these rates are double the current rates, and this cap is only in place for 10 years.
To hear the current administration talk, there are no limits on how much they are willing to lend to get every kid to college. And all this open lending is leading to increased college costs. A recent GAO report claimed, “Although increasing federal loan limits would give students more resources to pay for college, there is also concern that the availability of this additional resource might present an incentive for colleges to charge students more.” Since colleges are no longer on the hook to obtain repayments of these student loans, they have little to rein them in from increasing their costs. There is no end in sight for this vicious cycle.
The unique, and hotly debated in the financial world, thing about student loans is their structure compared to other loans. They do not have collateral to back them, as say a mortgage would. Your only collateral is your expected (though not guaranteed) future earnings. The hurdles to obtaining them are almost non-existent compared to a mortgage or consumer credit. Since the mortgaged back securities crisis of the last decade, private lenders are required by the government ensure that borrowers have the ability to repay their mortgage loans. In contrast, the government lends money to students with no examination of the probability that they will be able to pay it back. And lastly, student loans are almost impossible to discharge in bankruptcy proceedings. This is the most hotly debated point of all. You can read Andrew Woodman’s viewpoint on this here. Bottom line is, you must be a paraplegic single mom with six kids who have diagnosed learning disabilities in order to have this debt discharged. In other words, forget it. Several analysts say this last point actually makes student loans an appealing financial instrument for the private market, but they can’t access them the way the system is structured now.
So to recap:
Student loan debt is rising rapidly and expected to continue to grow.
The federal government controls almost all student loan debt, forcing out most of the private market.
The federal government makes money on this monopolized debt by A: collecting loan interest and B: selling SLABS.
The federal monopoly on SLD all but guarantees rising interest rates for student loans and corresponding costs for a college degree.
There will be no bailout by the government which controls this process because they are the primary lender and the courts will force students to pay back every cent.
College graduates who have not saved and/or cleverly invested for college will become slaves to the federal government when they were just trying to better themselves and doing what everyone told them they were supposed to do.
SLABS are best left to BBQ restaurants.