The subprime mortgage mess is taking its toll on the nation’s investors. Financial experts say that fixed income investors have seen their share of losses this year because of the precipitous decline in the subprime mortgage market.
At the same time, defaults on car loans appear to be rising, increasing worries for investors. As a result, some investors are wondering whether another major market for fixed income investors, student loans, may be the next sector to fall.
But the troubles affecting the subprime market and the auto loan market may not necessarily translate into problems for the student loan sector. Still, there is the distinct possibility that student loans could become a risky investment in the near term. That’s because student loan default rates have been increasing in the past few months. But while the defaults are cause for concern, they don’t appear to be a trend as of yet.
If, however, there is a noticeable increase in the unemployment rate, student loan defaults could escalate.
One of the advantages to investing in student loans is the fact that they are insured by the U.S. Department of Education. Private student loans are not federally insured, but applicants for those loans need to demonstrate a solid credit history in order to qualify. In addition, such private loans often require a co-signer who is legally responsible if the student should default.
Yet, the subprime loan crisis could have a potential impact on private student loans. If the housing crisis leads to a recession, new college graduates may find it difficult to find a high-paying first job. As a result, they may find it difficult to keep up with their student loan payments. So far, however, the housing situation has not fanned the flames of recession.
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