The Best Way to Cash In on the U.S. “Debt-splosion”

This is a syndicated repost courtesy of Money Morning. To view original, click here. Reposted with permission.

If you think bank bailouts were scandalous, then prepare to be even more outraged.

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That’s because more of this kind of debt forgiveness is coming. It’s virtually guaranteed.

Most view the bank bailout for the post-2008 financial crash to be the $700 billion TARP (Troubled Asset Relief Program).

In reality (and this is being conservative) the total is closer to $7.7 trillion. By some estimates, it’s a multiple of that.

And yet, as controversial as those bailouts may have been, I’m convinced we’re going to see more in the years ahead.

One sector of the debt market is ripe for forgiveness. In fact, we could be looking at over $1 trillion in bailouts.

It may take the next recession and bear market to convince many, but having the foresight could help you position yourself now before the crowd buys in.

U.S. Consumer Debt Is One Scary Picture

Household debt accounts for all types of debt within a given household. It only took a few years after the post-crisis deleveraging, and household debt has already climbed substantially.

Total consumer debt has reached historic levels – over $600 billion higher than when it last peaked. Today, it tallies over $13.3 trillion, having increased during 16 quarters in a row.

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Credit card debt in the United States is up to $830 billion, having increased by $45 billion since last year. Total revolving credit card debt has reached $1.04 trillion.

Despite prime lending rates being still very low historically, credit card rates currently average some 15.5% annually.

Over the past year, a whopping $104 billion was paid by borrowers in fees and interest alone.  This amounts to an increase of 35% since 2013. As long as the Fed continues on its rate hiking path, credit card debt will become an even bigger burden.

And if you think subprime loans have been cleaned up, think again.

Car loans are the new subprime. They’ve jumped by $50 billion over last year, now up to a massive $1.25 trillion.

The biggest causes for concern here relate to the subprime and delinquency aspects. Car buyers are being extended credit that many of them really shouldn’t qualify for.

Terms are creeping up, with loan lengths reaching up to 96 months. And worse, delinquency rates have surpassed those present during the financial crisis.

Yet as bad as all these types of debt may be, the elephant in the room is student loan debt.

This type of debt has tripled since 2008. Today, it stands at $1.5 trillion owed by 44.2 million Americans, and it’s headed to $2 trillion by 2022.

Cash in

As the laws stand now, student loans cannot benefit from bankruptcy status.

But I think that will change… dramatically.

I believe student debt is the one type of debt most likely to be forgiven on a massive scale, perhaps even on a level comparable to the bank bailouts.

After all, the holders of student debt are young people who range from those who’ve graduated a decade ago to those now entering college or university. They’re a wide swath of the American voting population… and they’re vocal.

Many of them are also quite disenfranchised. They’ve racked up tens of thousands of dollars (in some cases, hundreds of thousands) in debt to earn a degree that, in many cases, is unemployable.

If they can find work at all, it’s often in an unrelated field and low-paying. That’s why so many have resorted to taking on roommates or ultimately going back to living with their parents.

They simply cannot manage to support an independent lifestyle and repay their student debt.

Some have sought relief through much more drastic measures… like leaving the United States entirely.  Seriously.

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In a recent CNBC article, reporter Annie Nova describes how a 29-year-old philosophy major moved to a jungle in India in order to escape his debt.

Chad Haag became overwhelmed. His student loan is now near default. “If you’re not making a living wage,” Haag said, “$20,000 in debt is devastating.”

Haag’s story is far from isolated.

Chad Albright, with $30,000 in student loans, had to pay $400 monthly, but couldn’t find work in his field.

He moved in with his parents. Repayment difficulties torpedoed his credit score. Buying a car became more challenging, as did getting a suitable job, since some employers check credit reports. “I feel that college ruined my life,” Albright said.

Since then, he’s moved to China and then to Ukraine, teaching English.

Those who leave under these circumstances fear ever returning to the United States because they know it will mean garnished wages.

Right now, the average student loan debt is just over $37,000. The average monthly payment amounts to almost $400. That’s the second largest monthly bill other than mortgage or rent.

I expect the next financial crisis will lead to big legal reforms. It’s not difficult to imagine how tens of millions of voters facing a recession, or even depression, and unable to find work will call for their huge debts to be forgiven.

Consider that more than 90% of outstanding student loan debt is guaranteed by the federal government.

A giant bailout of this sector would of course be controversial. But the federal government would simply have to write it off.

That would instantly “free up” those funds that borrowers allocated to repaying student loans to spending on other things.

Especially in a time of crisis, this will be sold as a humanitarian move, a step to help the many who are struggling just to make ends meet.

It will also be sold as a “stimulus,” allowing all that freed-up cash to be plowed back into the economy with the goal of creating jobs, which naturally everyone wants.

And finally, we’ll be told that thanks to additional jobs being created and with them, higher consumer spending, the additional taxes collected will pay for the loans written off.

By now, you can probably see where this is going, and realize how likely it actually is.

Which is why you’ll want to consider this tactical move.

This Sinking Ship Is Your Next Profit Opportunity

Navient Corp. (NASDAQ: NAVI) is a $2.9 billion loan management, servicing, and asset recovery business. It was born out of a spin-out of parent Sallie Mae.

Its education loan portfolio is the largest in the United States, totaling over $300 billion in student loans across 12 million customers.

With the largest loan portfolio in the nation, it’s no surprise Navient has received the most complaints. In fact, it received the most in every state, ranging from 25% of complaints in Rhode Island to over 76% in Washington State.

Washington, Illinois, Pennsylvania, California, and Mississippi have all filed lawsuits against Navient for everything from misallocating customers’ payments to directing clients toward costly repayment plans to boost its bottom line.

Just recently, the country’s third largest student loan servicer dropped 9.5% in a single day after a report noted that an ongoing Department of Education audit highlighted deceptive practices having led borrowers to choose higher-cost plans.

Even the Consumer Financial Protection Bureau is suing Navient, stating that its practices are unfair, deceptive, abusive, and contrary to federal consumer protection laws.

This is a ship with a hole in its bow, and it’s taking on water at an increasing rate.

Consider shorting Navient from current levels, with a hard stop if its share price closes above $12.76. That way you can limit any losses if it happens to bounce back, while profiting if it continues to slide.

Student loan debt is the albatross around millennials’ necks. Cutting it free is the next bailout.

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The post The Best Way to Cash In on the U.S. “Debt-splosion” appeared first on Money Morning – We Make Investing Profitable.

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