Student loans in the US have reached over $1.7 trillion in outstanding debt, with concerns about the securitization of these loans in the SLABS market potentially posing a systemic risk to the economy.
Student loan debt in the US has grown significantly, surpassing $1 trillion in 2012 and becoming the largest non-housing debt.
The cost of education has risen substantially over the past few decades, contributing to the increase in student loan debt.
Many Americans holding student debt are unaware of the complexities of the loan securitization process.
SLABS (Student Loan Asset-Backed Securities) involve packaging and selling student loans as assets to investors.
SLABS lack transparency, making them challenging for average investors to understand. Securitization is a practice of converting assets like loans into securities traded by investors, benefiting corporations and investors alike.
Mortgage-backed securities (MBS) are the most well-known type of asset-backed securities. SLABS are specifically built around student loans, which are either federal or private loans.
Borrowers' student loans are bundled into pools with diversified characteristics to protect investors.
These loan pools are transferred to special purpose trusts, rated by credit agencies, and sold to institutional investors.