Ever been involved in a conversation where the party who’s doing all the talking about one thing inadvertently spills the beans about something way more important?
I felt that way after reading a recent Bloomberg post on securitized student loan debts. The authors of the article, which is provocatively entitled $40 Billion Worth of AAA Student Loans Are at Risk of Becoming Junk, appear to have intended it to be read one of two ways: as a warning to those who have already invested in securities that are collateralized with student loans, or a hot tip about an upcoming opportunity to buy government-guaranteed debt on the cheap.
To me, though, the article is yet another example of how our system of higher-education financing is indeed a toxic concoction of misaligned interests. Here’s why.
Bloomberg warns that two rating agencies (Moody’s Investors Service and Fitch Ratings) are contemplating downgrading $40 billion worth of securities that represent tens of thousands of student loans. But not because the borrowers have defaulted on their obligations. Rather, it’s that an increasing number may actually succeed in restructuring their contracts under the government’s various relief programs, much to the chagrin of investors.
That’s because investors purchased these higher-ed loans at prices that reflected, in part, a specific duration (10 years, in this instance) and the promise of a government buyback in the event of a borrower’s default. Therefore, when the feds provide relief to borrowers by extending the maturity dates for these contracts, or worse, forgiving a portion of the balance, it may very well cause what was a really good investment to morph into one that’s akin to the walking dead.
In fact, the Bloomberg authors essentially spell that out when they write, “Bondholders would be faring better if more Americans were actually defaulting, instead of pushing off paying down their debt through a variety of means.”