It may be wise for students to follow the lead of hedge fund managers in considering the risk-return trade-off of their education investment. It seems that hedge fund managers are avoiding student loans these days, sticking with relatively safer mortgage-backed securities.
Given the state of the economy, Milwaukee, Wis.-based Stark Investments is staying away from all student loan bonds right now. It is instead focusing on mortgage-backed debt with comparable yields and less risk, said portfolio manager Anup Agarwal. “We don’t expect unemployment rates to go down for the next year or two so it’s difficult to get excited about student loans against that backdrop.”
Uncertainty about student defaults has essentially frozen the market for bonds backed by student loans that aren’t guaranteed by the government. The volume of such bonds secured by loans made by SLM Corp., also known as Sallie Mae, is at just 16% of the level in 2009, according to rating firm DBRS Inc….
Historically, investors have assumed 25% to 30% of student loans bundled into their bonds will default. But today they are baking in between 30% and 40% default rates among the current crop of graduates, said Chris Haid, a director in asset backed trading at Barclays Capital. Even those assumptions are a best guess and defaults could ultimately go higher if unemployment rises, Mr. Haid said.
So what is the lesson for students?
Students should pick schools where the payoff from higher salaries upon graduation exceeds the cost of the education by the widest margin, he contends, especially when the job market contracts.
By that arithmetic, technical colleges come out on top, Mr. Ades said. “We’re in a skills based economy and what we need is more computer programmers, more [nurses],” he said. “It’s less glamorous but it’s what we need.”
Law school, on the other hand, can end up a sucker’s bet in periods of high unemployment, experts in student loan-backed bonds say….
What this boils down to for prospective students is that banks are lending less, and charging higher interest rates for the loans they do make. Colleges, on the other hand, aren’t charging any less. With less debt available to them, students will be forced to ask whether paying top dollar really pays off, Mr. Ades said.