How Student-Loan-Debt-Credit-Default-Swaps Will Brake the Donkey's Back in 2013...Student Loan Bubble

Alicia Badilla By Alicia Badilla, 11th Apr 2012 | Follow this author | RSS Feed | Short URL
Posted in Wikinut>Business>Investment

There is a situation brewing in the financial markets that US Presidential Candidate Ron Paul is aware of but many dismiss. Read on to learn more about this potential disaster known as the student loan bubble. You will also see how spot on Ron is when it comes to his view of the US Dollar and debt in America. And for how one can buy Credit Default Swaps on student loan debt and possibly make a fortune.

How much will students owe the US Government in 2013? Student loan bubble.

The Student Loan Bubble (SLB) will be at an estimated 1.3 Trillion USD.

Investors can buy CDS (credit default swaps) on securities backed by student loan debt.

The most important student loan source in the United States is Sallie Mae (ticker: SLM). They were a government-sponsored project that was eventually privatized. They are comparable to Freddie Mac & Fannie Mae. SLM alone services close to $200 billion of US Gov-backed student loan obligation. It has also started to issue confidential student loans, probably in an attempt to mask their pathetically rising debt to equity ratio which is approaching a whopping 40.

Sallie Mae is now on the boundary of collapse. A drop in collections would immediately translate to significant losses for the company. What could cause the student loan default rate to increase to 20%? If you answer that question, therein lies a fortune if your timing is right. Short the stock and as SLM starts to tank you will start to bank.

There is an ongoing and increasing tendency of student loan default. This will lead to either a collapse of Sallie Mae or a government occupation of the company. Both would be a blood bath for anyone owning the company.

Capitalistic universities (for-profit) have an appreciably elevated rate of student loan default. When compared to non-profit universities they have roughly a 15% default rate compared to a 10%.

Make a profit selling for-profit universities. When there is a massive student loan collapse your bet will pay off big. Here is a list of companies in that category who have close to 100% of revenues coming in the form of Federal Government Aid for students.

1. ESI (ITT Educational Services)
2. DV (DeVry)
3. APOL (Apollo Group
4. American Intercontinental
5. Art Institute
6. LA Film

There has been amplified examination towards the above entities predatory lending procedures. This will in due course implode the business model for these capitalistic educators.

At some point the Western World must deleverage. The SLB is what I believe to be the next major event. Why? Borrowing is rising to untenable levels. Continued high unemployment combined with the unjustifiably behemoth cost of higher education will eventually bring waves of mutilation in the form of noncollectable defaults.

America's debt crisis did not end with the subprime mortgage crisis. Mortgages, may have set off the trigger, but the SLB is an over looked iceberg in the water that could have effects beyond the imagination of some of the most evil of minds including that of Benjamin Bernanke.


Credit Card debt is now number two second to Student loans as private debt among US citizens.

Let us examine the cost of education vs inflation. Education costs have been far-outpacing inflation for the last 30+ years. Education costs gave increased almost 400% in that time period. In the United States if you don’t go to college you may be labeled as a futureless working class type.

Private universities have students from middle income families signing their names to debt on average from $50,000 up to $200,000 in student loan debt during their tenure as under-graduate students. This student loan bubble has students gaining useless masters, law, MBA and medical degrees. After graduation many are well over 6 figures in debt and unable to pay it back with unemployment rampant.

How to make money on the SLB?

Making money on the Student Loan Bubble is simple.

Investors can buy CDS (credit default swaps) on securities backed by student loan debt. You can also make a fortune shorting leading providers of student loans or some of the above listed universities.

Under US federal law, student loans are the only debt that can’t be forgiven through bankruptcy. Student loan collectors are tenacious flesh eating wage garnishing, penalty putting wood peckers who in the name of capitalism and doing what is best for bond/shareholders can double your student loan debt in order to maintain a return for bondholders. Sick isn’t it?

Same switch different day. Have a look at the housing mortgage debacle: When borrowers failed to pay, lenders seized assets (houses for a mortgages equate to wages for student loans).

When students have no income because they are unemployed or are desperately at a job with a low income, as hope of an enjoyable lifestyle starts to disappear the last thing on their mind is their obligation to pay back the federal government. In an inflationary environment this SLB will start to reach her breaking point as borrowers fail to pay even the interest on the student loan bubble.

There is an alarming number of students who owe the Federal Government money who are packing up, selling out and giving up on the American dream. They are leaving the US and starting a new life abroad. While some say the American Dream is dead there is a growing community who believe that the Panamanian or Costa Rican dream is very well alive. Why? Exile is heaven compared to a lifetime of debt and slavery.

Low income for college graduates and expatriation are increasing the default rate to the highest level on record. There is no end in sight, the question is not if but when this house of cards will come down.

Default rates over the last 3 years have risen to almost 12% for loans taken out in 2007 and almost 14% for loans taken in 2008. At this rate the next 3 years will be critical and as defaults approach that 20% deadly default rate. There will be a massive crisis and those who have invested in SLCDS (student loan credit default swaps) may turn thousands into hundreds of thousands and millions into billions....just like dirty old Paulson did in the mortgage crisis.

To make matters worse. The IRS...

Word on the street has it that paying off your student loan automatically triggers an IRS Audit. I have personally tracked down and interviewed more than a dozen post graduate students who paid off their student loans and then have been the subject of an IRS audit literally 3-6 months later. Douglas H. Shulman the 47th Commissioner of Internal Revenue Service declined to comment on this and the student loan bubble.

Where can you make a bet on US policy makers striking out on helping students? Here is a list of companies that can help you manage that risk:
Global Commodity Group Central America

Link to Other Wiki Pages By Alicia B
Credit Default Swaps & Where to Buy Them
Breaking: Super Committee A Complete Failure

Outside Links:


Buy Cds, Buy Credit Default Swaps On Student Loan Debt, Studen Loan Bubble, Studen Loan Debt, Studen Loan Debt Credit Default Swaps, Student Loan Bubble

Meet the author

author avatar Alicia Badilla
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I'm a Traveler/Writer/Investor At times I interview interesting professionals. Thank you for reading.

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author avatar Buzz
13th Apr 2012 (#)

Great advice, Alicia. Thanks for this info.

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author avatar Alicia Badilla
8th Jun 2012 (#)

When the Student Loan Rate Doubles it may be the straw that breaks the camels back.

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author avatar James Phillip
1st Jul 2013 (#)

Looks like you called it more than a year ago. The student loan rate is about to double and I smell trouble.

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