The idea of a student loan debt bubble looks exaggerated especially when compared to residential mortgages, securitization market experts said.
For starters, mortgage loans were written to the value of the house and it was the falling values that ultimately burst the real estate bubble. Student loans, on the other hand, are not written to an asset value and are essentially unsecured.
Sallie Mae Senior Vice President Kenneth Fischbach, said that there's a bifurcation of the market between private and government loans.
According to him, in the private student loan space, the lenders that had "very agressive models" have left the business. Borrowers in this space have also made more intelligent choices.
At this week's American Securitization Forum annual meeting, Fischbach cited figures that the average loan debt is still within a manageable range at $25,000. Those with more than $100,000 debt only comprise less than 3% of student loans and are typically borrowers with higher level education such as master degrees.
However, Standard & Poor's recently put out an article where it examined the education bubble as education expenses are outpacing what students can afford to pay. The agency also looked at how this can impact, from a national standpoint, whether students can afford to get the right skills sets to compete in global job market.
The note published in February looked at ballooning student-loan debt and increasing defaults and downgrades for some SLABS.
It is true that consumers are walking around with more debt than ever before and the rate of tuition increases, which the Education Finance Council estimated between 5% to 6% a year, will just increase the debt consumers hold.
Federal and private student-loan debt is approaching $1 trillion and surpassed credit-card debt for the first time in 2010, according to Mark Kantrowitz, publisher of FinAid.org, a college grant and loan Web site.
However, banks have very little exposure to student loans compared to subprime mortgages because the majority of student loans that are made are guaranteed by the U.S. government. From a securitization perspective, there is just not enough volume to make it a huge concern.
One securitization analyst that worked on the RMBS side before moving to consumer loans explained that while the rise in student lending is a concern, the notion that it is anything like the mortgage bubble will only confuse consumers.
"The residential housing market was worth more than $22 trillion before the mortgage crisis, which is more than twenty times the current outstanding student loan debt," he said. "Banks and investors are not exposed to the enormous amount of bonds backed by student loans as they were with mortgages. "
He also believes that run up in prices in real estate before the mortgage crisis and a subsequent fall of those prices contributed largely to the bubble bursting. "Student loans aren't secured on a tangible assets so borrowers aren't really exposed to risks like becoming underwater," he said. "The thing that happened with housing was the fact that borrowers became upside down and now they owe more on the house than the property value and, in some cases, it has caused borrowers to walk away. With student loans, you can't be upside down."
For now, student loan debt is also not allowed to be discharged in a bankruptcy. With mortgages, when the market collapsed, borrowers already had the option to just turn in their keys. "They walked away, but you can't just walk away from your student loan obligation," the analyst said.
With the U.S. government running a lion's share of student lending, it also looks unlikely that the sector will suffer from the same liquidity crisis that dried up funding for mortgages and contributed to the bubble bursting in the sector.
"It's not a bubble in student lending, it's more like slow type of bleed that is correlated to unemployment," the analyst said. "As long as it improves and people can get jobs then they can pay and improve balances."
