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How Will Student Loan Defaults Impact The Markets?

|Includes: AGNC Investment Corp. (AGNC), AN, BAC, C, DHI, F, FBC, FMCC, FNMA, GM, GNW, IMH, KMX, MTG, PFSI, WFC

The rising levels of student loan debt in the US has been no secret, and articles discussing the rising default rates have been frequently published by financial news outlets. 

What impact can these loans have on US equity markets? International equity markets? Bond markets? Credit markets? Inflation? The lenders? 

Below are some recent articles discussing the topic: 

Jumbo Loans Are New Threat in U.S. Student Debt Market

The looming student loan default crisis is worse than we thought

More people than ever are defaulting on student loans — and it could put the US economy at risk

The Student-Loan Problem That Won’t Go Away

Where student loan debt is a real problem

Citi just drew an 'eerily reminiscent' parallel between student loans and the subprime mortgage crisis

Many of these students will/would be future stock market participants. How will their student loan debt impact this? Just delay it? Ruin it all together?

Now, this debt can also impact many other types of loans as well. If students are defaulting on their loans, this will negatively impact their credit scores, making it far more difficult for them to obtain other loans (mortgages, auto loans, etc.). If they are able to obtain these loans despite their student loan delinquencies, it will certainly increase their cost of borrowing significantly. Lower credit scores and higher costs of borrowing could eventually impact the housing market and auto industry, as well as all of the related companies/industries - home builders, mortgage lenders, banks, home insurers, dealerships, auto manufacturers, etc. As an example, think companies like DR Hortno (DHI), Citigroup (C), Bank of America (BAC), IMPAC Mortgage Holdings (IMH), PennyMac Financial Services (PFSI), Wells Fargo, (WFC), Fannie Mae (OTCQB:FNMA), Freddie Mac (OTCQB:FMCC), American Capital Agency Corp. (AGNC), Flagstar Bancorp (FBC), Genworth (GNW), MGIC (MTG), Carmax Inc. (KMX), Autonation (AN), Ford (F), General Motors (GM). As well as many more related companies, such as ones that have the previously listed companies as customers.

Higher cost of borrowing across the board could also significantly impact the amount of disposal income these individuals have, leading to a lower money supply in the economy. 

Although this idea/topic does greatly intrigue me, these are just some of my initial brief thoughts. I would love to have more discussion relating to this material in the comments section below. How do you think this will impact the markets? Other industries? Investing as a whole? Feel free to leave your opinions below.



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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.