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ASF Panelists See Bubble in Student Loans

Panelists at this week's American Securitization Forum annual meeting drew comparisons between the mortgage market bubble to the one that is happening right now in student loans.

While mortgage debt is ebbing away, the amount of student loan debt is rising. Christopher Flanagan, head of U.S. securitized product research at Bank of America Merrill Lynch, said that student loans are "way overvalued" and borrowers are coming out of college who "cannot support that debt."

By contrast, housing demand still remains depressed. However, in some non-distressed markets, Flanagan said that some borrowers who have been on the sidelines are coming out to take advantage of record affordability rates.

Flanagan added that student loan debt has been piling up and contributing to the Federal debt problem. However, in terms of SLABS, it remains hard to translate what this would mean for price volatility.

John McElravey, head of consumer ABS research at Wells Fargo Securities, said that the effect of increasing student debt on ABS valuations is hard to determine at this point, although it can cause headline risk. "There's a cohort of new graduates with huge debt loads," he noted.

He also mentioned the legislation introduced by Dick Durbin (D-IL) that would treat privately issued student loans in bankruptcy in the same as other types of private debt. McElravey noted that this would lessen the number of student loan originations.

"It might not be a bad thing," McElravey said, as this would promote the "judicious use" of student loan debt.

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