Student loan default/pension crisis

I was researching the 2008 housing financial crisis and for many reasons but in a nutshell banks gave loans to people that could not afford them, hence the housing crisis. One thing I have noticed is that the current student loan situation is a huge problem. Just from observing, I noticed that a lot of students in college were taking out massive amounts of loans. I'm talking over 100k a year for just a 4 year bachelor's degree, some have even taken out 200k. The other issue is when students graduating from college are lucky if they get a job that pays 50k a year. How in the world are they going to pay off that big of a loan? Their getting degrees in things such as english literature which is not a hot field. Many seem to have this mentality that they don't have to pay it back.

The other issue is that it isn't just federal loans, they have a variety of private loans and the interest rate is just accumulating yearly. I did some research of my own and the current student loan crisis is over $1 trillion dollars, more then credit card debt. That is just the tip of the ice berg, considering you cannot file for bankruptcy. It has also caused many parents who have cosigned their children's loans to delay retirement because they have this huge financial debt over their head.

The pension crisis, well from my research majority of the USA doesn't have enough money to fund the government pensions. They are all overly funded and as we saw with the city of Detroit, many cities and states such as California are promising ridiculous things to people that they know they cannot fund but are promising them anyways. What happens when all this "money" runs out?

My overall questions is how can we profit off the student loan crisis? People are defaulting on their student loans, as well as pensions are going to run out, (just as Social security is doomed)

Please let me know your thoughts thank you!


  • Hello Lilrara 1717,
    Well For starters you could short the companies out right the manage the student loans. Like Navient or Sallie mae with have billions of dollars in loans. So in theory if all these students started to defaulting then these companies would go under because they would never get there money back. You could short there stock but you would have to have good timing. You could also short there debt like naivent just had some of there tranches upgraded. From my own research there are no CDOs or credit swaps on student loans. Before 2007 many CDOs were diverse an included student loans. I am not sure if any due contain tranches with student loans today.
  • edited April 2017
    I agree with you lilrara,
    anecdotally, I have a lot of friends with large student debt, $80k or more, there is even one with over $500k in graduate school debt. According to actual data, 1 in 4 are either in default or delinquent. I have been trying to figure out for the past few years how to profit when it all sinks.

    The difference between the housing defaults and the student loan defaults are the bank still has collateral to sell with houses, but there is nothing to sell with an education. So what can the bank take? Well, they can garnish your wages just like the government does with taxes. THEY WILL GET THEIR MONEY! Someone with $400k of student debt can not bankrupt themselves out of student debt, they will just end up paying more in interest in the long run. In my opinion, if the economic situation stays the same or gets better, then banks will get their money. The situation will dramatically change if our economy tanks, which is likely. So when you see the economy start to tank, that would be a good time to rush to short student loans.

    here is an article last year from WSJ
  • @rbldude14 it is interesting that you mention the amount of debt. I think 400k, now that is just absurd. Even if you are a doctor, making over 150k a year or what not after taxes what do they have to show for? You are right about them getting their money, it is quite scary. The student loan crisis is creating almost a system where people are slaves to their debt. The thing to learn is that the banks will be bailed out, but the students who are carrying on the debt are not going to be bailed out.

    Too many people are going to college and it is also devaluing education. Many issues. How would you start off shorting student loans?

    Also @PrestonPysh and @Stig I would be really interested on your thoughts about the student loan crisis and how do you think that will effect the future markets? I think this is something that a lot of the people are ignoring.

    Thank you for your thoughts!
  • @IiIrara1717 I don't disagree that there's a crisis on the horizon, but I'd argue there's not such thing as "too many" people going to college. The country as a whole benefits when the population is more educated. Even if you get some not terribly applicable degree, college teaches you how to think and problem solve, at least it did for me, and that is absolutely something our society can benefit from. The issue is the current system, not what the system facilitates.
  • I share concern on the student loan crisis. I do not see a breaking point that we can act on though. I may be wrong but I do not see the irrational exuberance. I do see significant impact though. This will be a major drag on wealth building for the next generation. Instead of earning dividends in the market, everyone is busy paying interest on these loans for decades. What is worse is that people are taking their good old time paying on them resulting in a more dramatic impact to the individual growth of wealth. It is difficult to measure the reward on such an investment and the interest charged but it is absolutely proving expensive!
  • @holychipotle do you suggest that someone pay off their loans as soon as possible? Not sure about everyone else but the interest is already factored in to my balance due. Every payment I've made the last 2yrs has gone towards the interest I owe. It even shows me on my account, percent of payments towards principle, zero. So why would I pay it off early when the amount I pay over the 10yrs or 1yr is the same. If I remember anything from economics class, it's wait to pay someone back as long as possible, unless there's a benefit to paying early. Something about you can always do more with money you have now i.e. invest it.
  • @istrong Interesting view point, my argument though is that college degrees are equivalent to high school degrees nowadays. It is not as prestigious as it was back in the 80's. I agree country as a whole does benefit when population is educated however college is becoming devalued when everyone is going to college but would do better going to a technical college. When the baby boomer generation retires, there will be a shortage of "blue collar jobs" such as electrician etc. because everyone is told go to college. When in reality there are many technical jobs where people are paid just as well if not better then a bachelors degree. Lets be honest here, we do not need a person getting a 4 year degree in lets say women's studies. That is not going to account for a job unless they go get their Phd. People are going to college for a worthless degree to become a starbucks barista. Not saying anything wrong with that but I am pretty sure people did not spend thousands of dollars to go to college to get a job to become a barista.

    @holychipotle I completely agree with you on the interest of the loans. I think the student loans is creating almost like a slave system, and their slaves to their loans. Even some of my coworkers who are in their 50s are still paying off loans. The statistic is one in four people are defaulting on their loans.

    Interesting article about JP Morgan selling their loans to Navient.

    What will happen though when more and more people default? The government and student loan companies will want their money back.
  • @istrong Evaluate your individual circumstances. I would personally not be motivated to pay anything off early if it were not saving me interest. Sorry to hear that you have it priced in. :/ I have been able to save on interest with my individual circumstances as with most debt. I love guarantees in the crazy world we live in :smile: Preston mentioned an awesome point on this a few episodes ago. Investing offers a 3.4% return in the general market today at the current prices versus paying off a mortgage with a more than likely higher interest rate. Preston opts to take the guaranteed return of paying off debt as would I.

    @lilrara1717 I overheard some tax stories this month. One gentleman had a small student loan he was delinquent on until he filed his taxes. :wink: The balance and interest was resolved when they deducted it directly from his tax return!!! The prosperity of this generation is dependent on the motivation to get over this hurdle. The more interest paid the lower potential for prosperity as with all major avenues of consumer debt houses, cars, etc.

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