U.S. student loan debt now equals the size of the $1.3 trillion U.S. high-yield corporate bond market, presenting investors with a complete different variety of dangers.
“Delinquency rates on student loans are much higher than those on automobile loans or mortgages, as a result of loose pupil loan underwriting criteria, the unsecured nature of student debt, and also the inability to bill off non-performing student loans in bankruptcy,”
Goldman Sachs analyst Marty Young and Lotfi Karoui wrote in a note Tuesday, “the significant majority of student loan default risk is borne by the U.S. Treasury.”
While the tendency of increasing defaults on student loans does not pose “systemic financial risks,” it will impact household behavior as the debt burden itself hurts home ownership rates, Young and Karoui explained.
The talk of student loan debt that is collateralized, meaning It’s backed by resources and known as asset-backed securities, is roughly $190 billion, according to Goldman Sachs. Of that, roughly $150 billion is linked to loans in which the repayment of their principal is ensured by the U.S. government.
“Most of those remaining student loan debt not in ABS format is provided to students by the U.S. government via its federal direct lending program,” wrote Young and Karoui.