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Securitization: Banks face up to student loans time bomb

Concern is again growing over unsustainable lending to over-leveraged borrowers, financing vastly overpriced assets that are subsequently securitized; only this time it isn’t mortgages – it’s student loans.

Student debt-780

Securitization funds such large swathes of everyday financial activity in the US that political risk – policy decisions that will impact the viability of underlying assets or their cash flows – is often high. The sub-prime mortgage market has been a political football for over a decade since the financial crisis, but that mantle is now passing to another stalwart of asset-backed securitization deal flow – student loans.

There is $1.7 trillion of student debt outstanding in the US, roughly 92.5% of which ($1.5 trillion) is backed by the federal government. That is a lot of money: student debt outstanding has risen by nearly 14% a year for more than a decade, while the cost of college tuition has risen 5.2% a year over the same time period. Student loans now account for nearly 10% of the US national debt.

According to the National Center for Education Statistics, the 12-year student loan default rate at for-profit colleges in 2018 was 52%, and the Brookings Institution has projected that nearly 40% of students who took out loans in 2004 may default on them by 2023.

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