Figure 1. Average Student Loan Debt Increasing
Welcome to another blog post. I have been posting about cryptocurrencies and my involvement with them. However, the world of cryptocurrencies is currently stagnant. What I want to do is talk about my prospective investment opportunities. A year ago, I wrote an essay on a dangerous financial instrument called student loan asset backed securities. They are also known as SLABS.
These instruments are just hitting the news now with how dangerous they are. Simply, SLABS are how banks and private lenders continue to lend out money. They package together thousands of loans into bonds. Investors can buy the bonds and earn payments while the bond is paid off.
Years ago, these bonds were very safe investments. A government institution insured them, so they were just as safe as treasury bonds. However, that program shutdown in 2017.
Figure 2. Student Loan Bond Contents
In the present day these bonds are very dangerous. When reading through the contents of the bonds, there are many low fico scores and non-cosigners. This means that there is a very high chance that they will default. Since student loans have no collateral, when the bonds fail the investors will be left with absolutely nothing.
With tough economic times coming up, there is a high chance that many of these bonds will start to fail. I am deeply afraid for our economy. Private lenders are becoming more and more prevalent in the United States. Also, the average tuition payment is continuing to grow so more and more of these bad bonds will be made. Therefore, a lot of money is going to be lost. With many of these bonds failing, investors will no longer purchase the bonds. Banks and private lenders will have a shortage of loanable funds and most likely will charge premiums to borrow. That will worsen the issue because people will be unable to pay back at such high premiums.
The defaults will also have negative effects in the housing market. If students cannot pay their loans, then they definitely cannot buy a house. With many baby boomers and the larger generations downsizing, dying, and moving into communal housing, a lot of real estate is becoming available. If there is nobody to buy this open real estate, then home values and real estate will slow.
My recommendation is to get a credit default swap on the bonds. Therefore, financial institutions should get short on these bonds. A credit default swap is like insurance on a bond. If the bond fails, then the value is payed out. I also think getting short in housing is a good idea. Finally, getting short in the private lender’s stock is perhaps the best thing you can do. For me the private lenders stock has produced over 10% profits, so it has worked so far.