Student Loans in a Pandemic

Student loan debt per capita is at record highs right now and with the economic shutdown and business restrictions in place, many people are worried about how they’re going to pay their bills.

Pre COVID-19

The burden of student loans has almost quadrupled since the Great Financial Crisis. Many investors and analysts believe it’s a bubble. However, for the people who are actually in debt, it’s just a burden on their quality of life.

What caused this?

● Average tuitions over the last 30 years have, in most cases, doubled and in the case of state schools, it’s tripled. These increases far exceed inflation seen elsewhere in the economy.

● Wages and earnings have been roughly stagnant which means that college degrees are much less affordable.

● The availability of federally subsidized loans has made it very easy to obtain funding to get a college degree. Education for everyone is great, except that colleges and universities are free to charge exorbitant tuition and fees since they know that the government will guarantee funding for students.

What’s Happening Now?

With so many people out of work, there are a lot of questions surrounding the repayment of student loans. There are a lot of suggestions on the table but let’s see what they’re actually talking about.

● Democrats in the Federal Government are pushing to forgive the student loans of healthcare and front-line workers in the pandemic. This would be very helpful, but only to a select group of people; in particular people who have not lost their jobs.

● Some politicians are talking about student loan forgiveness for everyone but it’s unlikely that this would happen.

● States are working with private lenders to ease the burden on borrowers until the crisis is over. The deals between states and lenders vary, but they typically include agreements to not issue negative credit reports, freeze lawsuits, waive late fees, and pause payments

What Strategies Should I Consider?

There are a few options that are worth consideration and one that you should ignore.

● DON’T bet on the federal government forgiving student loans. This is a popular talking point among politicians but the probability that it happens is very low.

○ If you stop making payments and expect this to happen you will regret it.

• Student Loans are one of the only forms of debt in the United States that are NOT dischargeable through bankruptcy. Even if you lose everything else, you will still have to pay back your Student Loan!

● Refinance! The Federal Reserve once again lowered the Fed Funds Rate which is going to impact interest rates on student loans. Take this opportunity to refinance and save some money on interest.

● Go back to school. If you return to school for further studies or pursue an internship or residency, you’re allowed to defer payments on your loan.

● Apply for other deferrals. Depending on who services your loan there are a lot of options available for deferrals such as economic hardship, unemployment, military service, or illness. Keep in mind that in all these scenarios, interest will continue to accrue each month.

● Call your representatives! Because of the pandemic, policymakers and politicians are working to come up with solutions to help. Let your representatives know that you need help and what would work best.

Investing

If you want to bet on what happens with student loans in the stock market there are a few good ways to do it.

● SallieMae ($SLM) is the government-sponsored-entity that originates and services loans

● Nelnet ($NNI) and Navient Corporation ($NAVI) also have a lot of exposure to student loans.

● A secondary reaction will be in real estate in college towns. Real estate will be hurt in two scenarios. Obviously, it will be negatively impacted if enrollment drops because people don’t want to take on loans anymore. However, it will also be negatively impacted if enrollment remains constant but the trend of taking classes online continues. If you want to bet on this happening, you can short the REIT American Campus Communities ($ACC).

Disclaimer: This is not a financial advice, it is only an opinion of ours. We are not licensed financial advisors, nor do we take responsibilities of your decisions. All investment decisions are your own and responsibility.