Some on Wall Street say $1.2 trillion in student debt could trigger the next market crash

JONATHAN MARINO | Business Insider

Famous hedge fund manager Bill Ackman believes that there is a crisis in the student loan business and that this crisis could tank the economy.

Ackman discussed his views with Bloomberg’s Jody Shenn and Matt Scully.

He thinks the federal government has loaned out too much money, about $1.2 trillion, to people who can’t pay it back. He thinks that eventually, political pressure will force the government to forgive those loans.

If the government did that, it would seriously damage an entire industry that services these loans.

Perhaps because they fear Ackman’s prediction will come true, many big banks are fleeing the student loan business.

Ackman believes a seizure in this lending market would result in a major hit to the US economy, the same way that the housing market crash did less than 10 years ago.

Not everyone on Wall Street agrees with Ackman. They believe the demand for education in the US is unlikely to subside. Those students will need to borrow money for tuition. There will be lenders to make those loans. They just won’t be the banks.

Others say there’s no way the government will forgive $1.2 trillion in loans.

We spoke with Wall Street about the student loan market. This is what they said.

 

• One economist at a big Wall Street bank opines that student debt is “still a fiscal headache rather than a financial risk.” He adds: “If anything the passage of time means that legacy privately held student debt is a smaller share of the pie so even less of a debt crisis risk.”
• Others say just because banks may exit student lending doesn’t mean they can’t be replaced. “The new entrants are focused on refinancing and [loan] consolidation,” says a source at one big student loan provider, which he called “back door” loans.
• “If the government cuts back on student loans, there are private lenders looking to pick up the slack,” our lending source said.
• “The federal government is no more likely to forgive all student loan debt than it is going to give every citizen living under the poverty line $10,000, though the latter would do more to stimulate the economy,” said Mark Kantrowitz, senior vice president with Edvisors, an online financial planning service for students. “The baseline demand for student loans continues to increase and overall new volume will start increasing again in a few years.”
• “Forgiveness of student loans becomes much harder” when you factor in private lending, said Tom White, cofounder and CEO of iQuantifi. White speculated that when the Federal Reserve does decide to raise rates, as long as no student lending ‘forgiveness’ bill is being debated in Washington, more investors may flock to the private lending side of the business to take virtually guaranteed returns.
• “You’ll see defaults creep up” if private lenders raise rates, too, White said.

 

Source: Business Insider