Shorting Student Loans???

Question

Is it possible to short student loans? If so, how?

So many students graduating/dropping out of college with loans and no jobs in the near future.

Is there any way I can buy insurance on a student loan investment, and when people default the policy pays off? Is that possible?

Any thoughts/suggestions are appreciated.

Ktrain · Answer

Is it possible to short student loans? If so, how?

So many students graduating/dropping out of college with loans and no jobs in the near future.

Is there any way I can buy insurance on a student loan investment, and when people default the policy pays off? Is that possible?

Any thoughts/suggestions are appreciated.

MSUbobcat · Answer

I don&#x27;t know of a way the common man can.  The Wall St. guys can cook something up just like they did with CDO&#x27;s on mortgages.&#xD;&#xA;Keep in mind though unlike a mortgage you can never walk away from a student loan.  If you buy a $500k home and it drops to $200k you can mail the keys to the bank.  If you take out $100k in student loans and can&#x27;t find a job there is no mailing that diploma back to the school you are stuck with that loan for life.  Could there be a crash, sure, but nothing like we did in &#x27;08, and the Wall St. guys are already all over this anyway.  Again unlike when everyone thought house prices were going to go up forever, people are well aware there is high unemployment, and school prices are at all time highs=higher loans.

be easy · Answer

[Quote: Originally Posted by MSUbobcat]  I don&#x27;t know of a way the common man can.  The Wall St. guys can cook something up just like they did with CDO&#x27;s on mortgages.&#xD;&#xA;Keep in mind though unlike a mortgage you can never walk away from a student loan.  If you buy a $500k home and it drops to $200k you can mail the keys to the bank.  If you take out $100k in student loans and can&#x27;t find a job there is no mailing that diploma back to the school you are stuck with that loan for life.  Could there be a crash, sure, but nothing like we did in &#x27;08, and the Wall St. guys are already all over this anyway.  Again unlike when everyone thought house prices were going to go up forever, people are well aware there is high unemployment, and school prices are at all time highs=higher loans.  [/Quote]keep in mind, the difference between recourse states and non-recourse statessome fishy shit going on with all the modding of loans, attempting to shift people from non-recourse into recourse loans

Ktrain · Answer

Be easy, can you please go more in depth on recourse states? What recourse do states have?

I understand people can't just walk away from student loans. I understand that they aren't wiped off in a bankruptcy. But at some point people aren't going to be able to keep up with payments if they can't make a certain income. What happens then? I have also heard that if you just make minimum payments, that any principle left may be forgiven. Any truth to this? Just wondering if there is a way to make money off this situation?

MSUbobcat · Answer

It is a fed thing not a state thing. There are very few ways to get out of them. I don't know the exact numbers, but private school defaults are like 10%, public 15%, and for profit 20%. Give or take a few percentage points as it has been a while since I reading something on these.

When you default that isn't really like a true default since the gov. has so many way to get their money, garnesh wages, tax returns, social security, I think they can ban you from the military. There are also all sorts of programs out there to keep you out of default that I don't think enough students will risk facing default on a student loan to drive the numbers.

So I 100% think you are on track that default rates will rise a bit, but being backed by the gov. there isn't much that I can think of the common man can do to trade against them. If you think of something let me know.

You could bet against the publicly traded for profits like Phoenix (betting against the school, not the loan), or short SLM (cash cow, don't do it, don't!).

TheU3221 · Answer

just read an article, that by 2014, student loan defaults will be somewhere between 28 but more likely upwards of 34%, so u know sharks like Goldman, Citi, Bof A. will figure out away of shorting student loans just like they did mortgages, guaranteed or not by the Govt.Bottom line jobs will never be back in America like before, because of so much outsourcing &amp; we just dont make things anymore like we use to, because we cant compete w Asia &amp; India, but somehow, someway Investment Banks will figure away to make money on shorting defaulting student loans

AustinHoopDream · Answer

this is a tough one. with fed guarantee as the backstop. perhaps the stocks of the private universities may take a hit, but the federal government never lets you get rid of student loan debt. not even through bankruptcy.

depeche2 · Answer

&#x27;Til death do us part.  Death eliminates student loan debt, but that&#x27;s about it.

dimedimenickel · Answer

Shorting the private colleges that churn out diplomas and don't provide much else is a popular trade. Corithian, Apollo, Phoenix, etc. It's been a good one too. Hard borrow, low ev/current ebitda make it susceptible to huge moves but the thesis is in-tact as these schools have little economic value added and thrive solely from govt student loan assistance.

I recommend finding a theme that has the same thesis but that isn't tied to a collateral that can never go bad. Buying student loans in the bond market is safe because 1. govt guaranteed. 2. u can default on them until you die.

And libor/cp or whatever the index is now is zero or close to it so interest rate on these is nothing so why would a person walk away when it costs so little to keep it afloat.

We are 2 years into a jobless recovery and you know obama is going to throw all the sh!t on the wall next week hoping something sticks in order to get re-elected. So i would be careful shorting in here going into next week.

When looking at shorting, focus on technologies/businesses that wouldn't/ shouldn't be around in 10 years. Say, given all the apps on a smart phone will companies pay XXX to Lamar for highway advertising 10 years from now? Or will advertising start to be imbedded in your car on your dashboard on demand when you decide you want to eat, etc, etc. Lamar has a lot of debt too which always help on a short. Either way, Lamars MOAT is weaker because of apps on an iphone then say 2 years ago. Then if you think Lamar is screwed find every public supplier to Lamar and short them, etc, etc, all the way down.

This is how the newspapers short started. 1st short the papers, then the pulp produciers, then the magaizines, etc, etc.

One guy told me that all the work is done early and all the reward is done late with shorting. Sometimes it can take 5 years for a short thesis to play out, you just have to pick your spots and be patient. No different then capping.

Good luck.

dimedimenickel · Answer

sorry for typo&#x27;s.  long day.

Ktrain · Answer

&#xD;&#xA;No worries. Really good insight. I&#x27;m just looking for a way to short student loans more than a particular company. It looks like there isn&#x27;t a way right now but maybe something will be put together by Wall Street. &#xD;&#xA;I&#x27;m thinking someone may try and package these together and sell them if people start defaulting on loans.

dimedimenickel · Answer

Short student loans as a individual or as a hedge fund / limited partnership? To buy CDS you basically have to be a QIB and get an ISDA? This mean anything to you? There is as of yet no Index to short like say the ABX (pools of subprime loans). The underwriters of these loans (SLM, NNI, etc) to my knowledge have been keeping them on the books and not packaging them. If I'm mistaken please enlightening me.

Ktrain · Answer

[Quote: Originally Posted by dimedimenickel] Short student loans as a individual or as a hedge fund / limited partnership?  To buy CDS you basically have to be a QIB and get an ISDA?  This mean anything to you?  There is as of yet no Index to short like say the ABX (pools of subprime loans).   The underwriters of these loans (SLM, NNI, etc) to my knowledge have been keeping them on the books and not packaging them.  If I&#x27;m mistaken please enlightening me.  &#xD;&#xA;&#xD;&#xA;[/Quote]&#xD;&#xA;I don&#x27;t think I will be enlightening you on anything in the financial sector. You&#x27;re light years ahead of me in knowledge of this stuff. &#xD;&#xA;I have no clue about CDS, QIB, or ISDA&#x27;s but I did understand the second half of your statement.

dimedimenickel · Answer

Best of luck.  Go read Michael Lewis&#x27;s lastest if you want a good education/get up to speed.  I think shorting actual subprime loans from an individual standpoint isn&#x27;t possible YET.   Big Short I think its called.  Great read.

Ktrain · Answer

I&#x27;ve read a few of Lewis&#x27; books. I like some of them, others were a bit over my head. Moneyball is one of my top 5 favorite books of all time. Liar&#x27;s Poker is another. &#xD;&#xA;If you happen to see anything on shorting student loans or any other opportunities, even if they aren&#x27;t for the individual investor, please update the thread. I&#x27;m always interested in reading this sort of stuff.

Shorting Student Loans???

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