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What Would Happen to the Student Loan Portfolio If the Debt Ceiling Is Breached?

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In less than two days, if Congress cannot reach an agreement on the debt ceiling, it will be breached. This means that that U.S. Treasury will be unable to pay the bills. Thus far, the U.S. Treasury has not been vocal about what they will do if the ceiling is breached. But when it comes to student loans, the ones owned by the U.S. government, things could get problematic if the U.S. Treasury finds itself selling off its assets. Of course, there is always talk about this sort of thing happening (for instance, there are oftentimes suggestions that the national parks and the large swathes of federal land in Idaho and in other Western states be sold off and privatized. Thankfully, that has not yet occurred).

In fact, the old legacy regime (the overseers of student loans - the big ones being Sallie Mae and Nelnet), those who were part of the FFELP program, always wanted something like this to take place, i.e., the total privatization of the student lending industry. Indeed, Mitt Romney, while campaigning in the last presidential election, called for the resurrection of the old FFELP program. While that is unlikely to happen, if the student loan portfolio were to be totally privatized, a new, far more insidious program, the FFELP program on meth and cocaine, could indeed emerge.

But right now, this is merely hypothetical. Nevertheless, it warrants attention due to the serious nature of the current situation, as we are nearing default rapidly. That means that selling off student loans is no longer outside the realm of possibility. If this were to occur, if the U.S. Treasury found itself having to sell off the student loan portfolio, who could be some of potential buyers?

Here are four possible buyers:

1) The Federal Reserve could buy the debt. After all, they do buy government debt.

2) Outside foreign interests - that's right, countries such as China or Russia could buy the U.S. government's student loan portfolio. In fact, when it comes to how much of the old legacy (meaning the FFELP loans) is owned by China, no one can say. We're talking about securitized loans, and these are basically impossible to determine who owns them, because they are bought in big packages - in derivatives - so it is difficult to sort out who exactly owns the old legacy loans. In this case, outside foreign interests could swoop in and buy up the current student loan portfolio. That would certainly not be a good thing.

3) The Big Pension Companies and the Big Endowments - some of the proprietary schools are akreadly owned by pension funds, so they might be a contender, too. For instance, Corinthian Colleges is owned by pension funds. David Halperin wrote an excellent article on the subject. In a word, Corinthian Colleges is owned, in part, by Teacher's Union Pension Funds.

The Big Endowments, such as Harvard, Stanford, Yale, and so forth, could also choose to buy the student portfolio. Although, this is highly unlikely, because it would hurt their brands. After all, it would be clear as day that in purchasing this debt, they would be truly profiting off the backs of students in an absolutely direct way.

Bottom Line: These scenarios aren't good for borrowers or taxpayers. After all, if the student loan portfolio were to be sold, what would happen to the terms and conditions of repayment? Whose to say they wouldn't change if, say, China bought up all this debt?

Right now, luckily, this isn't a possibility. That said, given the way in which extremists in the GOP have taken the government hostage, it could, unfortunately, become an option. Given the ideological lunacy of some of these folks on the Hill, it would not be surprising if they offered up the student loan portfolio in order to completely privatize the student lending industry and get Uncle Sam out of the lending process entirely.