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Student Loan Industry

Written By Brian Hicks

Posted April 14, 2009

Financial crisis? Recession? Depression fears? Fuggetaboutit.

The market just finished its best month in recent history, a surprise for even the most optimistic. And sure, a lot of buyers are beginning to step in, as expectations for earnings season are set so low, it’ll be hard to disappoint.

But be cautious.

An end to our current bear market is as premature as Jim Cramer calling an end to the depression fears. Unemployment will continue to climb. Consumer spending will suffer. And housing is only expected to worsen, as more resets rear their ugly heads.

Just ask Meredith Whitney. . .

Whitney just reiterated her bearish position on the financial sector and the overall economy. And while some are forecasting recovery in 2009 or 2010, she (and we) believe that banks have still not “properly reserved against greater than expected losses in home prices.”

Still, if the “geniuses” of Wall Street want to draw this “end of crisis” conclusion from Wells Fargo’s preliminary numbers, that’s just great. We can then stop the bailouts, stop flooding the market with cheap money, and leave banks to live or die. Sounds great to me.

And if you believe the worst is over, that’s fine. But we were the same people that successfully called for the downside in:

• Subprime and housing,

• Financials with FAS and XLF puts and calls,

• U.S. Treasuries,

• Commercial and residential real estate,

• And the Casino industry to name a few.

And these days, not only are we calling for a resumption of sell-offs in the bear market, we’re also calling for quick and sudden drops within the education sector.

Here’s why.

The Next Scorched Sector: Student Loans

The crisis that nailed the above sectors has its sights set on student loan stocks, too. As you may be aware, the government could revamp the guaranteed student loan program that would cut out private lenders and bring all federally backed lending to the U.S. Department of Education.

And as President Obama urges an end to government subsidies for student loan providers, a number of stocks are just beginning to swan dive into falling knife patterns.

Putting an end to these subsidies could save the U.S. billions every year. And the only roadblock is congressional approval. . . but this one looks imminent.

Here’s an excerpt from a recent New York Times editorial…

"The [new administration’s] budget rightly calls for phasing out the wasteful and all-too-corruptible portion of the student program that relies on private lenders. And it calls for expanding the less-expensive and more-efficient program that allows students to borrow directly from the federal government. That means doing away with the Federal Family Education Loan Program, under which private lenders receive unnecessary subsidies to make risk-free student loans that are guaranteed by taxpayers."

A number of stocks are going to get battered by this. Right now, the Obama proposal would require college students to borrow directly from the federal government by July 2010.

But nothing’s set in stone just yet. . . Prepare for quite a fight over this one.

Worse, just as delinquencies crushed other financials, it could crush student lenders, too. Default rates for those who recently left school rose to about 7% from 5.2% a year earlier, as the deteriorating economy weighs on borrowers.

That rate, according to Bloomberg, is based on borrowers who “were to begin making repayments between October 2006 and October 2007, and who fell at least nine months behind by late September 2008.”

Of those, about 232,000 entered default, a 13% increase from the previous year and a 43% increase from two years ago. And because of these higher defaults, lenders will have no choice but to tighten belts, toughen up borrowing standards, and increase interest rates – moves that could screw borrowers, too.

But don’t think for a second that this is all "bad news" for investors. If you know how to play your cards right, cashing in on failing companies – for several hundred percent gains – can be as easy as taking candy from a baby.

Truth is, members of Options Trading Pit have been doing just that since this financial collapse started. In fact, earlier today, they cashed in on another massive 338% gain – from a single play, within six trading days!

If you’d like more information on how to join this exclusive group and why we’ll give you $1,000 if we don’t show you at least 49 more double-digit winners by April 15, 2010. . . just click here!

Good Investing,

Ian L. Cooper