Why student loans may be the next bubble

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The U.S. has amassed more than $1.7 trillion in outstanding student debt, according to the Federal Reserve Bank of St. Louis.

Billions of dollars worth of student loans are packed and sold as assets known as student loan asset-backed securities to some of the biggest investors in America.

But as student loans continue to balloon, experts have expressed growing concerns surrounding the SLABS market. The worry is that SLABS could pose a systematic risk to the American economy, similar to how subprime mortgage-backed securities contributed to the crash back in 2008.

“I saw the parallels and it really freaked me out because I realized that this cycle was only going to repeat,” said Allison Pyburn, an asset-backed securitization expert and former editor-in-chief at Debtwire ABS. She continued, “I think one of the key ways to uncover the similarities between student loans and mortgages is to look at the affordability issue.”

The national cohort default rate for student loans has plummeted, according to the U.S. Department of Education, boosted by the payment pause during the Covid-19 pandemic. But the Consumer Financial Protection Bureau estimates that one in five student loan borrowers have risk factors that could cause them to struggle when federal student loan payments resume in October.

“I think what’s scary about it and what was scary about 2008 was the tremendous uncertainty that everyone had about what valuation even was,” said Pyburn.

But not every expert sees eye to eye.

“I think to say this market is going to be the trigger of the next financial crisis is really overstated,” according to Xiaoqing Eleanor Xu, a professor of finance at Seton Hall University.

Elen Callahan, head of research at Structured Finance Association, added, “The SLABS market is much smaller and therefore poses less of a systemic risk to the economy.”

Increased credit enhancement, following the devastation of the 2008 recession, was put forth to protect against this exact scenario.

“Even if there are substantial charge-offs, they’re mostly going to be absorbed within the internal and external credit enhancement measures that have been put forth very aggressively after the financial crisis,” said Xu.

Watch the video to learn more about why experts are concerned about the state of the SLABS market.

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