Student Loans Raise Other Risks as Debt Equals U.S. Junk Market

(Bloomberg) -- 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 whole different range of risks.

“Delinquency rates on student loans are much higher than those on auto loans or mortgages, due to loose student loan underwriting standards, the unsecured nature of student debt, and the inability to charge off non-performing student loans in bankruptcy,” Goldman Sachs Group Inc. analysts Marty Young and Lotfi Karoui wrote in a note Tuesday. “The substantial majority of student loan default risk is borne by the U.S. Treasury.” 

While the trend of rising defaults on student loans doesn't pose “systemic financial risks,” it does impact household behavior as the debt load itself hurts home ownership rates, Young and Karoui said.

The share of student loan debt that is securitized, meaning it's backed by assets and known as asset-backed securities, is about $190 billion, according to Goldman Sachs. Of that, about $150 billion is linked to loans where the repayment of the principal is guaranteed by the U.S. government.

“Most of the remaining student loan debt not in ABS format is provided to students by the U.S. government through its Federal Direct lending program,” wrote Young and Karoui.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net.

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Eric J. Weiner

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