Student Loan Defaults May Trigger SLABS Litigation Bilzin Sumberg


US student loan borrowers owe an estimated $ 1.7 trillion on their student loans. About 92% of that amount is federal student loans (debt owed to the US government), with the remainder due to a growing market of private lenders. Despite the fact that default rates have increased steadily since 2003, a significant market has developed for student loan asset-backed securities (SLABS). This market, and the world of student loans in general, is now rocked by a confluence of factors creating great uncertainty as to what the future holds. These factors include the prospect of future student loan legislation, lingering concerns about the effects of COVID-19 on the economy as a whole, and structural changes affecting securitizations and student loan underwriting.

With a new presidential administration in place and a change in control of the Senate, there is a lot of speculation about potential new laws and regulations relating to student loans. It seems likely that the new administration will push for increased funding of tuition fees through mechanisms such as larger Pell Grants for students. The student debt waiver will likely be reviewed. There was a lot of talk in the Democratic presidential primaries about loan forgiveness, but most observers currently expect any forgiveness approved by Congress to be a relatively small amount, perhaps 5,000. $ to $ 10,000.

Economic trends are also causing growing uncertainty about whether to invest in SLABS. Default rates remain high and student loans, unlike mortgages, are unsecured. This makes investors particularly vulnerable to defaults. Additionally, current low interest rates generally mean lower potential returns for investors, making SLABS less attractive at the moment.

The resurgence of virus cases creates even more uncertainty. Difficulty predicting what the ultimate effects will be on the global economy can lead to a certain mistrust of SLABS, especially since it is reasonable to expect that students will have more difficulty repaying. their outstanding student loans after the current moratoriums on payment obligations expire.

With defaults likely to increase, look for a slight increase in litigation related to this type of investment. Investors can be expected to feel motivated to use lawsuits, or at least the threat of lawsuits, as a recourse to recoup the losses they are likely to suffer.

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