Is the College Debt Bubble Ready to Pop?
Financial bubble (n.) – a rapid expansion in a particular market or asset, followed ultimately by a steep contraction. Prices often rise far above where they should logically be, considering fundamentals or intrinsic value.
The aftershocks of the housing bubble still plague many Americans, but an even bigger bubble is raising red flags. The skyrocketing price of a college education is causing an epidemic with student loans as more people rack up unsustainable amounts of debt to further their education. These loans are often bundled together and sold in a bond offering. While the appetite for risky assets is strong as the Federal Reserve punishes savers with low interest rates, investors are not willing to take a chance on some bonds backed by student loans.
Sallie Mae, the largest non-government student lender, was recently forced to cancel a $225 million bond offering after two weeks on the market, according to people familiar with the deal and The Wall Street Journal. The lender was reportedly trying to sell the bonds with a 3.5 percent coupon, in a deal led by Bank of America (NYSE:BAC).
Bonds based on student loans are quite popular. According to Bank of America, Sallie Mae and other issuers of the securities have sold almost $8 billion worth of bonds year-to-date, compared to only $5.7 billion in the same period last year. However, investors and students both have their limits.