Sell Those Indenture Instruments Immediately! The Debt Ceiling Disaster and Student Loans

As I mentioned earlier, Bloomberg reported that if the US defaults and loses its AAA rating, investors might begin to sell off government-backed student loans. The value is a drop in the bucket. It's merely $250 billion in government-backed securities. So . . . yeah, no biggie. But perhaps being so nonchalant about  the issue is wrong? Hmmm . . . I wonder. Since I have been wondering and reading some piss-poor 'analysis' on the subject, I asked people who actually know what they are talking about.

I've spoken with a few economists as well as with a savvy financial reporter, and asked them what they think would happen to student loan debtors if the US defaults. Here's what they had to say:

I'm leaning toward believing that a complete collapse of the financial system, as well as the dollar, would be a *good* thing for the indentured educated class (in a narrow respect), as systemic failure might be the only thing that would cause actual *big* corrective actions to be taken, e.g. a blanket debt forgiveness/Jubilee or other such things. In addition, if the banks collapse, our bought-and-sold-passed-her​e-passed-there debt instruments might simply disappear within the system, as the chain of ownership collapses!

Quite intriguing and optimistic even though the collapse will be, obviously, cataclysmic.

Someone else asked me what could happen to loans that have been consolidated and have fixed rates. Certainly nothing will change with those loans, and the rates in place won't change. But it would be insane if that turned out to be false. Can you imagine the number of people who would be ruined financially if they changed those terms and conditions?

I am, by the way, not trying to be alarmist. In addition, I am not suggesting that this will happen. We - all of us - are merely theorizing, because no one really knows what will happen if the US defaults.

Finally, another reliable source suggested that variable rates could skyrocket. The cost of new loans would most likely balloon.

Thinking about the ramifications of investors selling off government-backed loans is just wild!

Related Links


Julie Haviv, "Dollar hits record low versus Swiss Franc in debt standoff," Reuters (July 25, 2011)


"The Debt Ceiling: Why It's A Real Issue For The Indentured Educated Class," AEM (July 25, 2011)

"Steve Eisman Blasts For-Profits, Arguing 'Subprime Goes To College," AEM (May 28, 2010)

 "We don't want those mutha-f$#%!-ing indenture instruments! Sell! Sell! Sell the indentured educated class off!