Well the CDOs are probably tranched, so there will be some portions that are safe. But in general, you'd think the student loans would only be in trouble if there's a large increase in the unemployment rate. You'd get a meltdown if the government were to announce a change in the laws.
Sort of. They took the shitty bottom tranches from the mortgage CDOs and repackaged them as new CDOs. The credulous ratings agencies gave these new CDOs the same rating as the old ones but it took only a modest market downturn to wipe out even the top tier of these second level CDOs. Even this might not have been a problem if the whole thing hadn't been massively leveraged. The fact that mortgages were involved was nearly irrelevant. This shitshow could have been built on anything. The regulatory reforms that tackled the mortgage market were missing the point.
> But in general, you'd think the student loans would only be in trouble if there's a large increase in the unemployment rate.
I thought the government guarantees these loans, but maybe I mis-read that, mis-understood, or something changed. I think the borrower is still on the hook and accrues fees if they don't pay but I also thought the federal government literally paid to keep the bank whole.
Even if you can't discharge the loan in bankruptcy, if someone can't pay, you as the lender have a problem. The balance in your favour might keep increasing with the borrower totally screwed, but that doesn't really help you if nothing is being paid.
Have to wonder how this interacts with the US healthcare system. As people get older they are more likely to have health problems that prevent them from working and cost a bunch of money.
>The balance in your favour might keep increasing with the borrower totally screwed, but that doesn't really help you if nothing is being paid.
The secret is to lend money and then make people spend it on something worthless. You know, the easiest way is to lend someone money so they can gamble the money away. You might now argue that this is terrible for the lender, but only if the lender doesn't own the casino. Then the gambler ends up in massive debt for no benefit. It doesn't matter if the borrower repays the loan or not because the lender didn't lose a single penny and every payment results in profit.
This is just a hypothesis because I am not aware of any banks or financial institutions operating an educational institution, except maybe lambda school which was heavily incentivized to get people to sign up for income sharing agreements but then only deliver some low quality MOOCs with the only source of support being TAs who themselves are former lambda school graduates.
This is why I'm asking. If that's the case, then I think even I would want to invest heavily in them. As long as the US government continues to make the money printer go BRRRR, this is an investment vehicle that simply cannot fail. (Until it does, in which case it will do so in a most-spectacular fashion.)
There are some loans the government guarantees and other loans that the government merely makes immune to bankruptcy. Obviously, they have different risk profiles.
