It never ceases to amaze me how history repeats itself in the market. I was thinking that this morning when I read that JPMorgan Chase is getting out of the student loan business. This comes as a surprise to basically no one, and JPM was actually one of the last holdouts in this business. The only remaining major bank in the student loan business is Wells Fargo.
The reason for all the banks getting out of the business is that the government has completely taken over. In the space of two and a half years, the government has grown to control over 80% of the student loan business. And that's not a good thing.
We all know student loans are a bubble. A full 25% of outstanding student loans are now in arrears, with many borrowers publicly insisting that they neither feel any obligation nor have any intention to repay their loans. The trend is only going to get worse as tuition rises at a breakneck pace and employment remains relatively stagnant.
The student loan bubble is now looking so much like the housing bubble that Federal Student Aid might as well change their name to Fannie Mae. Because it's the exact same situation.
Go back to 2007 for a minute. One of the first signs of trouble in the CMO and CDO business was shrinking liquidity. In other words, the banks were exiting stage left. We now know that they weren't just getting out of the business, many were actively betting against it (ahem, Abacus). By the time 2008 rolled around and the music stopped, there were bodies everywhere.
The banks aren't going to get caught flat-footed again, which is why they're all getting out of this crazy business. Now someone just needs to engineer a way to bet against this market.
Can you imagine what it would be like to sit there John Paulson-style and pick out individual borrowers most likely to default? That would be so easy it would be like stealing. But this student loan market is setting itself up for it. The taxpayers are going to get crushed.
Somebody in exotics please tell me you're working on this, because this short is a 3-inch putt. Seriously.
I don't know. Most student debt is $25k and below and college is still a good investment over ones life. The default rates are skewed by for profit schools which do nothing but rob people. Nothing will be done though because republicans will protect the big businesses behind these rip off schools and Dems support the ruse that these schools provide to minorities and low income people.
And while you can choose to not feel obligated to pay back your loans, student loans have the strongest collection rights of any debt I've seen. They'll garnish your damn SSI.
IMO, start capping the amount of debt you can take, thereby forcing people to go to cheaper schools or find a way to pay the difference. Maybe cap student debt at that cost of tuition at a state school of something.
Profit is a good thing; profit just means that someone is willing to pay more than it costs to produce something. We want more for profit institutions, not less.
The problem is tax payer guaranteed student loans. Give people the option to default on their student loans and this problem ceases to exist.
But in this case, it's the purest form of cronyism. "For-profit" post-secondary education isn't profitable on a standalone basis; government student aid accounts for the vast majority of their funding and certainly the entire portion of their profit.
Puts on APOL (Appollo Group) and DV (DeVry)?
I've done some digging on this - I would actually avoid shorting the group. The allowable cohort default rates are well established, and these companies manage to them. If they exceed a % of funding from Title IV funds or a rolling default rate, they lose access to federal aid...which would kill them.
But they are aware of this, and have taken fairly drastic steps to manage this risk. For instance, Kaplan (WPO sub) literally offers a no-obligation trial period for its classes, and requires its students to pass a preliminary assessment before they can continue.
There has been some talk of requiring these institutions to achieve a certain job placement rate or median income among graduates. But this legislation has consistently been defeated. It's also extremely difficult to implement.
I think these institutions will survive a long time, but I think it is common knowledge that they are poor value propositions for the consumer.
If you're looking to invest in the sector, online centric providers (STRA) and institutions with large healthcare enrollments (DV) are relatively safe. Both have lower cohort default rates than the norm (DV's undergraduate program has typical default rates, but average is brought down by their healthcare program).
"There has been some talk of requiring these institutions to achieve a certain job placement rate or median income among graduates. But this legislation has consistently been defeated. It's also extremely difficult to implement."
Makes me wonder how well represented these for profit colleges are in D.C. I bet they have lobbyists up the wazoo.
Still, if the drum on the student loans crises were to beat loud enough, there could be legislation that could sway the price of the stock. (One way or the other)
If gainful employment legislation passed in its currently proposed form it would decimate all of the large, publicly traded for-profit higher ed institutions (hit particularly hard would be the schools with significant Bachelor's degree exposure due to the reduced amortization periods). In all likelihood the finalized GE rules will be a watered down version of the most recent proposal, which was released in the past few weeks.
http://www.insidehighered.com/news/2013/09/03/new-gainful-employment-pr…
They don't call us the entitlement generation for nothing!
(Do they call us that?)
Great topic, I've been wondering about this situation for a while now. Let's just hope ProShares can come out with a leveraged ETF in time.
I have to agree with TNA on this one. I see a lot of people's minds' boggled by the overall size of the student loan debt market, but it's kind of an oxymoron: there's no market. I've written several times about solutions to the situation, and it's really just a matter of will at this point. I think that the axe is eventually going to fall on the for profit schools that can't demonstrate strong job placement, but aside from that, having educated people (even psych majors) is a public good that's hard to put a price on.
I can't think of a way to bet against them, at least not a scalable way. It's like betting against a national park, FEMA, the DOD, or the federal reserve as an institution: how can you short a gov't agency? I just don't know how you can make money on being right. The only way this would be possible is if the gov't started selling the debt off, and you take a position against the purchaser, but who's going to buy this debt at this point? They've already started to restructure the student debt beaurocracy and there are more developments in the pipeline.
Sooo, how can we make money off of this/bet against it?
Kim Taylor's looking hotter by the minute. I hope Cuban keeps his paws off her.
Co-signed. There's just something dirty-hot about that chick.
//www.youtube.com/embed/CxPvUO7OI30
Great post. I think JPM realized what kind of bubble they were pumping. Shit will hit the fan pretty soon. I am glad I will be out of school by then.
Sallie Mae is probably the best short play here.
Yeah, I'd have to agree. If I have some spare cash in my investment account, I feel like I might short them.
Shit, I don't know if I could short it TODAY given the timeline uncertainty, but if you hedge you might be okay.
Agreed with Eddie 100%. Just makes me glad I'm finished with school.
Can't say I'm really surprised. Really, no one should be. This is what happens when the government tries to subsidize anything. Prices get pushed, without any fundamental support for them. Colleges and universities don't have to price their "product" within any semblance of reality, as they know no matter what, the government will always be there to write loans big enough to buy a new BMW to anybody who wants to spend 4 years studying basket-making. A little bit of an exaggeration, but let's be honest. How long could this go on? Me myself? I'm in it for about $41k. Not a small amount of money. I'm not too worried about my abilities to pay back, because I know I have useable, marketable skills and knowledge that I can put to work somewhere. However, I know people that spent 4 years getting a degree then deciding it wasn't what they want to do. Now what. And if there was a measurable amount of those at my tiny school, how many more exit every year from the large public universities in every state. These are people that don't often have more than a few dollars to rub together, no credit to speak of, almost no assets (their MacBook Pro is probably the most valuable thing they actually own), the question isn't how could the default rate soar to dangerous levels, it's how hasn't it so far.
The main reason is that the repayment terms are so ridiculously easy that even if you work at McDonald's part time, you can probably pay off even $50k + in student loans. Of course, it will take you so long to do so that even with a decent interest rate (in terms of the lender's perspective), there's no way that this is a profitable business anymore. And of course, where there's an inefficient, unprofitable business, there's a government organization to take it over and milk it dry until it blows up. Then cover their asses with tax dollars.
Of course, the other reason this is becoming a big deal is because of the economy. Obviously. So, now its finally all coming to a head. Slowly but surely, it looks like the government will have a monopoly on student lending. Tell me how this is supposed to work. Also, tell me how higher education prices are supposed to go down when the government is providing almost infinitely inelastic demand for an "asset" that already is more or less necessarily. This is an equation for disaster. The schools know they could charge $100k a year and the government would still have no problem writing six figure loans to 18 year olds who don't even know what an interest rate is.
So yeah. Please. Somebody structure some bonds on student loan payments so that someone else can insure them so I can buy those swaps and retire to an island in the Pacific in a few years or so. Because there's no way this can go on without it all falling down at some point.
/
Maybe...but think about it. Do you really think they wouldn't just spend that money the instant they got it on other stuff? First rule: Any new tax designed to "eliminate" a certain problem usually gets blown through instantly because we're already trillions in the hole.
Buy SLM Jan '15 22 puts Sell SLM Jan '15 25 calls
Also like the Apr '14 25 straddle or 24-25 strangle if you're not feeling directional due to the macro environment
National sales tax to support student loans has less of a chance of happening than repealing Obamacare.
Like all this. Will probably do something like this in the paper account.
I would be weary about shorting anything as all of these companies seem to be in Obama's big ears... wouldn't be surprised if he converted a private institution into a publically operated one. Unfortunately its not wise to challenge the US gov't.
Unfortunately I tend to agree, although they aren't smarter than we are. Eventually the money stops coming. The market will speak, regardless of what anyone says, or thinks. As long as SLM is publicly traded, I think there's a chance that in the future, there will be money to be made. Although it's not exactly flying high, things would have to get pretty bad.
Yes, somebody please short SLM and let me know how that goes.
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