The Next Subprime Crisis: Student Loans?

In 2008, it was the subprime mortgage sector that unleashed the financial crisis.  With the stock market at nearly the same level as it was in 2008, many investors question whether it can continue to rise so swiftly.  Undeniably most of the rise that has occurred as a result of the QE that has taken place over the last four years.  So the question is what event will set of the next 2008?

One potential option is student loans.  Last year the student debt rose to over $1 Trillion.  That’s right $1 Trillion.  This is 1/15 the size of the US economy.  Student debt is rising at a rate of about $40-$50 Billion per month right now.  What makes this ticking time bomb even more dangerous is that roughly 27% or $270 billion of all student loans are 30 days past due.  Fitch made this information public recently in the following statement:

“Fitch believes most student loan asset-backed securities (ABS) transactions remain well protected due to the government guarantee on Family Federal Education Program (FFELP) loans. The Federal Reserve Bank of New York recently reported that as many as 27% of all student loan borrowers are more than 30 days past due. Recent estimates mark outstanding student loans at $900 billion- $1 trillion. Fitch believes that the recent increase in past-due and defaulted student loans presents a risk to investors in private student loan ABS, but not those in ABS trusts backed by FFELP loans.”

So right now many students are struggling to pay back their student loans and what is scary is that this number does not include individuals who are barely making it right now or are using other forms of debt like credit cards in order to continue to pay their student loans.

On top of all this, unemployment amongst this particular groups of individuals is at an all time high.  Look at the two charts below.  There are so many individuals in this particular group that are unemployed and many more graduating from college every year and are not able to find a job or are under employed.  This simply means they are working less hours than they want or are making less money than they normally would given their work experience and education.

At the end of the day, student loans are a massive stack of dynamite with more stick being added to the pile each month.  Investors will need to keep an eye on this dangerous minefield.