First, a few words on 2 short-term trends I'm seeing at the moment. I think the stock market is at the dangerous cliff edge of a significant correction, which could happen any moment. I know I have been talking about this for quite a while and I'm wiping out eggs on my face for now, but I'm stubbornly thinking this is coming closer and closer. I'm not talking about one or a few days of market decline, even severe ones like we have seen in the past few days. I'm talking about a sustained decline over 5-10% for weeks or a few months. The other opposite trend is gold stocks. Again, I have been talking about this for quite some time but this sector has relentlessly kept going down. I'm seeing a lot of blood in the streets now and to me this is a great opportunity to make money when nobody wants to touch them, if people have courage and patience.
Now back to today's topic. It is well known that a substantial proportion of the US college students are getting loans for their college or graduate studies. This also includes a good chunk of student loans for studies in for-profit colleges. But not many people know how big student loans are and what are the problems associated with them. It is reported that the total amount of student loans outstanding is approaching $1 trillion. This is huge. The most worrisome problem with such huge loans is that 31% of the loans were already 90 days overdue. According to the U.S. Department of Education, "for-profit colleges" have a 3 year average default rate as high as 22.7%. The worst part is, the default rates continue to go up. People have to understand, not likely home mortgage loans, student loans are not backed up by anything and per the US law, one can not get rid of student loans even if they go bankruptcy. So the situation is much worse than the home mortgage loans, which have blown up the US and even the whole world's economy.
I hope more people can really understand the situation and wish something could be done to turn this around. Unfortunately it is likely a wishful thinking as the mess is too big now. Likely we as taxpayers will have to pick up the tag to pay, just like what occurred to the burst real estate bubble. However, savvy investors may proactively do something to fight against and profit from the super bubble in brewing.
SLM is the biggest student loan company, formerly known as Sallie Mae. Sounds familiar with the two mortgage companies? SLM's market cap is $9.21 billion but its student loan portfolio is worth $154 billion. In other words, this is a disaster waiting to materialize. The incredible thing is that, despite all of that, SLM has just sold $1.1 billion worth of student loan this year. It is pure stupidity! I don't know what else I can say about those who "invested" in such loans. They have just brought home a time-bomb waiting to explode. Well, other people's stupidity can be your profit opportunity. Shorting SLM will turn out to be a great success at some point. I'm not suggesting to do so immediately but I'm pretty sure I will do so some time in the future.
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