Why relaxing terms on student loans could backfire
Here’s a problem with the idea of taking it easier on student borrowers: Wall Street doesn’t like it.
So what, you say. Students can’t handle all the debt they’re borrowing. We need debt forgiveness and easier terms. Wall Street should just suck it up.
Except that when Wall Street doesn’t like something, it tends not to suck it up. It tends to walk away.
And if Wall Street walks away from the student debt market, then students will find it impossible to borrow.
Why? Because those organizations that lend student money aren’t the real lenders. They sell the loans that they make to other people, who then package those loans and spin bonds off them, which are then sold to Wall Street types, like investment houses, mutual and pension funds.
This is a process called securitization, and you can watch a short video on how it works here:
Securitization turns government and private lenders into lending machines, because they can make loans, sell them off, and then make more loans. So long as Wall Street wants to keep buying the bonds that are spun off these packages of loans, the lenders can keep lending. But if demand starts to fall off, the “bundlers” won’t be able to buy loans from the lenders, which means those lenders won’t be able to make those loans.
And demand will fall off, if programs designed to give students more time to pay back their loans mean they fail to make the regular interest payments that are the lifeblood of a securitization. If investors think there’s a danger they might not get an interest payment every month, they’ll look for other bonds to buy.
Or they’ll demand more in interest for the increased risk, and that will drive the interest rates on student debt even higher.
Leaving students badly in need of a drink. Which they won’t be able to afford.
We’re here to help you navigate this changed world and economy.
Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.
In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.
Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.