Like most things in life, the fastest way to pique the interest of college students is by offering them free food… Or give them free money. Or raise the price on their beer.
Which brings us to the recent bill Congress passed and President Obama signed into law tying student loans to the 10 yr Treasury Note Yield. Now, we can think of a couple positive implications to enforcing this idea. First, the most obvious is that at the moment, students won’t have to pay back as much money. Since Congress was unable to act on a deadline earlier this year, interest rates doubled to 6.8%. However, with this new law, undergraduates for the upcoming year will only have to pay a 3.8% interest rate for both subsidized and unsubsidized loans. Second, this bill takes the power out of the hands of elected officials. Congress will no longer have the capacity to arbitrarily set college loans interest rates, and students will no longer suffer each instance our nations lawmakers don’t get along. Finally, the most important part of this law is there is now a cap on student loan interest rates, regardless of 10 yr treasuries. NBC provides those numbers:
“Interest rates will not top 8.25 percent for undergraduates. Graduate students will not pay rates higher than 9.5 percent, and parents’ rates would top out at 10.5 percent.”
That sounds all fine and dandy, but this idea has also had its fair share of controversy, especially from Matt Taibbi in Rolling Stone. Some say he has good reason to be upset. Undergrads paying 8.25% on unsubsidized loans which can never be wiped away is a bit like indentured servitude.
Picture Courtesy: The Rolling Stones
But being futures folk…. what really got us thinking with the incredible rise in student loan debt and now the tie to 10yr yields, is whether these young college grads saddled with the debt are going to be ready for the changes in 10yr yields and what that will do to their monthly loan repayments?
As the law reads, each year the interest rate changes based on the 10 yr Treasury Yield plus a spread depending on who is carrying the loan, then the rate is locked into that price for the academic year.
Undergrads = 10 yr yld. + 2.05%
Graduates = yld. + 3.6%
Parent Loan = yld. + 4.6%
So, if we look at a hypothetical Ivy League grad who leaves campus with say, $150,000 in debt, and a 10 year loan term – that graduate is looking at monthly payments of about $1,600 per month with 10yr yields at say, 2.95% (2.95% 10yr + 2.05% spread = 5% interest rate on loan). Now imagine 10 yr yields double from 2.95% to 6.00%, pushing the loan near it’s max at 8.05%. That student’s monthly loan repayment is now pushing $1,850 per month, or if we say it has about 8 years left in the term – about $25,000 more in interest payments.
With an increase in interest rates already on the horizon, these numbers might scare the crap out of college students with loans (if they thought about what’s on the horizon). Which makes us think this may be just the thing to create the next wave of futures traders. You see, all those trillions in student loan debt tied to the 10yr Treasury note could now be hedged against a rise in said 10yr rates via the futures markets. That’s what the futures markets are here for. By the way… sorry HFT.
So maybe, just maybe, we’ll see a big push at colleges to train their students not just in the basics of finance like how to balance your checkbook and not load up on credit card debt; but also the nuances of the futures markets and how to effectively hedge their interest rate exposure. Maybe the CME will come out with an emini 10yr note contract so these students can match their contract size with their exposure. And maybe pigs will fly.
But this does touch on what some see as a growing problem in our industry. With the trading floors a shadow of their former glory and everything now electronic – where are the next wave of futures traders going to come from? It is common now to meet with a successful CTA, broker, or other industry participant and hear how they got their start on the trading floor as a clerk, a runner, and so on. But what will we be hearing 20 years from now? They got their start at Groupon coding SQL server queries?
Our friend John Lothian from MarketsWiki and the various JLN newsletters and websites, has been seeing this as a problem himself. He set out this summer to do something about it, launching a Summer Intern Education series this past July in order to get that next generation of young entrepreneurs interested in the futures industry. Kudos to John and the industry folks who participated.
So whether the next futures superstar gets his or her roots in the futures industry because Congress’ recent bill forces young people to learn about futures hedging out of necessity (highly doubtful), or whether they have their eyes opened to the world of futures through a concerted effort of industry folks who groom the next generation now that the trading floor is gone – we just hope the next generation is out there, somewhere.