Mark Cuban, a businessman who owns a movie house chain and the NBA's Dallas Mavericks and appears as an investor on ABC's "Shark Tank," says the rising cost of college tuition is part of a "student loan bubble" that could rival the collapse of the housing market. Leave it to Wall Street to figure out how to make a quick buck from the burgeoning student-loan crisis. The FOX Business Network has learned that investment firms such as private-equity powerhouse Carlyle Group are weighing whether they should snap up student-loan collection agencies -- companies that help lenders recover funds from borrowers who default on their loans. It is unclear where Carlyle and other firms stand in terms of their investments in any of the nearly two dozen companies that specialize in collecting student debt (a Carlyle spokesman declined to comment). Some experts say investors have been spooked by some of President Obama’s recent initiatives to forgive student loans, while others say these are short-term fixes that won’t have much impact on the business of collecting on student debt. Either way, one thing is certain: With nearly $1.11 trillion in outstanding student loans and a slow job market, Wall Street believes higher student loan default rates are inevitable and companies that collect on this debt are a good investment. “There has been a significant growth in student loans and in defaults over time so it has been a nice area to invest,” said Richard Close, senior research analyst at Avondale Partners. “The growth in student loans over the past five years has been significant.” With college costs rising and incomes falling, particularly for college grads in industries other than technology and finance, many economists are predicting massive student loan defaults in the years to come. Already $121 billion of the more than $1 trillion in loans are 90-plus days delinquent or in default and those numbers are expected to grow, making collection companies even more important. There are around two dozen such outfits; four of these collection agencies are publicly traded and three of them are subsidiaries of larger companies such as JPMorgan Chase (JPM) and Sallie Mae. Wall Street executives eyeing such investments say loans that are already in default generate the biggest profit margins for debt collectors. Getting students to repay defaulted loans means potentially huge profits since the companies’ fees are based on a percentage of the loan’s total balance, as opposed to a fee based on servicing a loan. According to industry experts, profit margins for collection agencies are roughly 30% as opposed to the loan servicers earning roughly 20%. “Servicers earn roughly $21 per borrower each year,” said Michael Tarkan, senior vice president at Compass Point, an investment bank in Washington, DC. “Collection agencies can earn 10% to 15% of the entire loan balance,” which is a larger payout, Tarkan added. One such company, Performant Recovery (PFMT), earned $36 million last year and its shares have risen nearly 20% in the past three months, indicating that investors believe higher default rates will make the company more profitable. Last week, President Obama unveiled legislation that would extend a program called “Pay As You Earn,” which caps borrowers' monthly student-loan bills at 10% of their income. Some investors said the move could dampen the appetite for collection companies among private equity firms like Carlyle. “There is a strong push by the administration and both sides of congress to lower the number of loans that enter default (meaning fewer loans will be sent to the collection agencies),” one Wall Street executive said. “This could slow the growth in defaults and cause investors to determine these firms are no longer a good investment,” he added. Others say that the president’s legislation won’t lead to a notable change since the size of the problem is enormous, and growing. The share of 25-year-old Americans with student debt increased to 43% in 2012 from 25% in 2003, and the average loan balance rose 91%, to $20,326 from $10,649, according to data from the New York Federal Reserve Bank. Household debt from student loans has risen at a faster pace than any other form of household debt, according to a report by Goldman Sachs. “I don’t think there will be much of an impact on the market since they have already passed legislation like this before” and it hasn’t stopped student debt or default rates from increasing, said Tom Crosson, director of media relations and communications at the Consumer Bankers Association. Student Loan Forgiveness Program Available To Millions Who Aren't Utilizing It, CFPB Says06/23/2014 WASHINGTON -- More than 33 million workers qualify to have their student loans forgiven because they work in schools, hospitals or city halls, but too few take advantage of the options because the programs are overly complicated and often confusing, the government's consumer advocate said Wednesday. Roughly a quarter of the U.S. workforce could take advantage of federal rules that give favorable loan repayment options to those in public service fields, including the military, according to the Consumer Financial Protection Bureau. The agency recommended Congress review the loan forgiveness programs and encouraged employers to make sure their workers know they are available. "Teachers, soldiers, firefighters, policeman – public sector careers invariably involve some effort, some inconvenience or some sacrifice. People give up higher incomes to serve their city, their state or their country," said Richard Cordray, director of the CFPB. "We believe that people who contribute part of their talents, part of the benefits of their education, to society as a whole should not be mired in debt because they stir themselves to the calling of public service." Student loan debt has topped $1 trillion, the consumer advocate estimates, and has been a drag on the economy as recent graduates are forced to choose between paying down their loans and buying a house or a car. That sends millions of dollars to lenders instead of keeping that cash in the local communities. For many graduates, there are multiple programs in place to ease the financial burden of taking lower-paying jobs to help their communities. But the system is fraught with complications and competing options and a firm number of how many graduates could benefit is hard to come by. "The data is quite weak in this area. We don't have a sense of how much money is left on the table," said Rohit Chopra, the CFPB's student loan ombudsman. "But we suspect it's a substantial sum." The consumer advocacy bureau knows how many people qualify because they work under the broad umbrella of public service. "We estimate that one in four working Americans has a job that meets the definition of public service under this program. Many of these teachers, health care workers and other public servants could be eligible to have their college loans wiped out after ten years," Cordray said. The definition is broader than that, though. For instance, clerks at the state department of motor vehicles office, secretaries at city hall and accountants at non-profit arts groups also qualify for the loan forgiveness programs – positions not typically seen as public service jobs. But the largest group of beneficiaries would be those in education – more than 6.8 million people. The Education Department's statistics arm estimates the nation's schools will need 425,000 new teachers by the end of the decade. But college graduates aren't necessarily going to flock to the classroom without some incentives; the National Education Association pegs the starting salary of a teacher at less than $36,000. "Public service employees – most especially teachers – never get into the teaching profession to get rich. They have a deep passion," said Jeffrey Bourne, the chairman of Virginia's Richmond School Board. But it's tough to recruit teachers, he said, and loan forgiveness programs make it easier for new teachers to take lower starting salaries than their classmates as they start their careers. He said too few of those in his districts know about their options. Similarly, the demand for nurses, police officers and social workers is expected to outstrip supply of these often lower-paid professionals. "With high expectations and increasing budget pressures on cities, it's become more important than ever to attract, retain and reward outstanding individuals," said Peter Buttigieg, the mayor of South Bend, Ind., who has pledged to help his city's employees navigate the programs. "You'll run into some people who think starting their career in a public sector job is a luxury they cannot afford because of their student loan debt," Buttigieg said. "The reality is that crushing student loan debt is making it more difficult for our employees to stay in public service." Original Article published by Huffington post, Author Philip Elliott The student loan default rate is soaring, and it's flying highest among for-profit schools. The U.S. Department of Education reports that across the nation, the share of borrowers who default within two years after college loan payments become due has risen nearly a full percentage point to 10 percent, while the rate for people who default within three years is up to 14.7 percent. The numbers get worse among for-profit schools. For-profit institutions continue to have the highest average rates of defaults, at 13.6 percent within two years and 21.8 percent for the three-year group. Such schools are often criticized for offering debt-funded, high-priced educational programs to vulnerable people who then don't find jobs but are saddled with loan obligations. "The growing number of students who have defaulted on their federal student loans is troubling," U.S. Secretary of Education Arne Duncan said in a statement. "The department will continue to work with institutions and borrowers to ensure that student debt is affordable. We remain committed to building a shared partnership with states, local governments, institutions, and students -- as well as the business, labor, and philanthropic leaders--to improve college affordability for millions of students and families." There is more than $1 trillion in student debt in the U.S., as people take on increasing amounts of debt to fund costly educations as they try to gain an edge in an ever more competitive job market. But as bad as the numbers sound, experts who follow the country's debt problems say they're even worse than the data suggests. First, borrowers need to have missed nine months of payments before being counted as in default -- a much longer string of missed payments than commercial borrowers would accept. Even with that head-start, the statistics don't paint a full picture of people who are staying just ahead of their obligations, or are keeping their heads above water only intermittently. "It doesn't capture the people who are struggling," said Robert Hiltonsmith, a policy analyst at Demos. He noted that federal statistics show that a third of people who are not considered in default have missed payments. "Those are a lot of people who have missed payments, are struggling, and racking up late fees and extra interest," he said. What's behind the steep rise in college tuition? He also noted that the government is charging high rates for the federal loans and is collecting huge profits off the loans. "It's ridiculous that people are paying 6, 7, 8 percent," he said. "The federal government is estimated to be making $50 billion a year in profit off these loans. And guess where that money is going? To pay off our national debt." Hiltonsmith and others want the government to allow refinancing at more favorable terms. And for the smaller number of cases in which people declare bankruptcy, student debt should be dischargeable in bankruptcy proceedings -- as the law stands now, there is no way for someone to get out from their debt load. He noted that 17 percent of people in bankruptcy have student loan debt. Original article by Charles Wilbanks, CBS Moneywatch |