Student Loans: The Next Investment Opportunity


Student loan debt has surpassed credit card debt. That fact you likely know. Here's a couple more facts:

  • Student loan debt is second in this country to mortgage debt.
  • Student loan debt has reached the trillions of dollars.

What you might not know is how you might benefit from all this debt. Here's a quick rundown.

The Origins

Many high school graduates think the only way to succeed in life is through college, so they go with or without a plan. These kids often don't consider the total cost of college or even whether they will get a decent ROI. They might never make enough to justify the expense.

Student loans are very easy to get, so easy that 71 percent of college seniors have student loan debt, according to Bloomberg. Kids borrow money, go to college and don't think about the debt they're creating for themselves.

Shades of the Mortgage Crisis

The more student loans students take out, the more colleges can charge for tuition. Tuition costs continue to rise because they can with the false market created by the easy availability of student loans. If you think this sounds a lot like the mortgage crisis of 2008, you would be right. Many people have made that comparison.

Average Debt Rises Each Year

The average student with student loan debt who graduated college in 2014 had a student debt load of $33,000, according to The Wall Street Journal. That was up from the class of 2012. The average debt for those graduates was $29,400. And those figures are just averages. Many students have debt far greater than that.

Interest Rates Rise Too

To make matters even worse, interest rates on student loans will go up this year. The Fed artificially kept the rates low for a while to stimulate the economy, but that was never supposed to last. Many students were unaware of that fact, however, and are now dealing with loans that are more costly.

Refinancing Student Loans

The solution for many students is to refinance their student loans, an option Senator Elizabeth Warren recently made possible. About 75 percent of students with loan debt meet eligibility qualifications for refinancing.

And this is where investors can jump in. (Keep in mind that student loan debt cannot be discharged in bankruptcy.) Here are the two ways to get in the game:

  • Accredited investors can invest in funds that hold student loan assets.
  • Investors can lend directly to students using a peer-to-peer lending service.

Regarding investing in securities backed by student loans, many investors can't get enough. In fact, demand for the riskiest of the bunch was 15 times greater than the supply was last year, according to The Wall Street Journal.

Conservative investors might consider peer-to-peer lending. The two biggest players to keep an eye on are CommonBond and SoFi.

SoFi is the largest student loan refinancer in the marketplace. It has refinanced $1.3 billion in student loan debt. Both it and CommonBond set high lending standards. And both loan to students who have already completed an eligible undergraduate or graduate degree program.

SoFi, for example, lets investors pick from either a general pool or one linked to the school they attended to invest in. One MIT graduate who chose the second option told Forbes Magazine he earns 4 percent to 5 percent on his SoFi investments.

And SoFi, by being picky, has a zero default rate so far. Compare that with the current federal student loan default rate of 13.7 percent, according to The Washington Post. The federal government typically doesn't check credit records of loan applicants.

Here's an interesting tidbit: Both CommonBond and SoFi not only pause loan payments for borrowers who have lost their job, they help borrowers find a new one.

An Added Benefit

By investing in refinanced student loans, you would be helping students. You could help make it possible for students to reduce their debt load. And being able to choose which school you support makes the investment more personal. This is not to suggest that investors choose this investment strategy only for the feel-good aspect. Student loan investors are just as concerned with earning money as any other investor is.

Fairly New

The market for investing in refinanced student loans is still in the early stages. More big players are likely to enter the arena soon. And you might see the traditional peer-to-peer lending companies, such as Lending Club, add student loans to their mix.

Student loan debt will be around for a long time to come. The biggest risk these startup lending companies have is the possibility of the government starting to refinance their own loans at rock-bottom rates. But that has not happened yet, and it might never happen. Investing in student loan assets could be the right decision for you.

Related Articles

Residential Real Estate Investing 2015 Why Inner City Real Estate Makes a Smart Retirement Investment A Wealth Building Strategy That Pays Dividends
Your browser is out-of-date!

Update your browser to view this website correctly. Update my browser now