Billionaire hedge fund manager Bill Ackman is not one to shy away from making predictions. The Pershing Square Capital Management CEO is perhaps most famous for his crusade against Herbalife (NYSE:HLF) and his $1 billion bet that the company will succumb to future SEC probes.
Now Ackman is making more candid predictions about the state of the $1.3 trillion worth of outstanding student loans that increased from $363 billion a decade ago. He foresees U.S. students not being able to pay back their debt and compares the current state of student loans with the subprime mortgage bubble.
“Young people are the kind of people that protest,” said the 48-year-old Ackman.
Ackman believes the administration will be forced to forgive student debt even though about $100 billion of federal student loans are already in default. And, the increased number of defaults, coupled with rising tuition, growing faster than inflation at schools like the University of California does not make for a prosperous combination.
Another staggering statistic released by the Federal Reserve Bank of St. Louis states that nearly one in three Americans who have to pay down their loans are at least one month behind on their payments. In addition, the delinquency rate for borrowers who are at least 30 days delinquent climbed from 11% to above 17% in the past ten years. This rate is determined by looking at borrowers who need to make payments right now as opposed to the delinquencies of all Americans who have student debt.
Defaults were most prevalent among individuals who had the least amount of debt. In research released by Federal Reserve of New York, those who had the highest debt burden above $100,000 had the lowest rate of default at 17.6%. An explanation offered by the researchers stated that Americans who may have small loans balances ultimately drop out of school and do not receive well-paying jobs to fund their debt.
Ackman noted that student loan forgiveness would need to take the form of a “helicopter drop,” a program jokingly coined by Ben Bernanke in 2002 where the Fed would throw cash from helicopters to combat deflation.
A more realistic federal program suggested to forgive student debt is one where borrowers would be allowed to reduce their loan principle with the down payment on the purchase of a first home. Despite fears that the student crisis would prevent millennials from purchasing real estate, data from top national lenders show that mortgage applicants with student loans are not being turned down more often than those without debt.
However, Ackman still remains pessimistic that students in debt are reliable.
“If you think about the trillion dollars of student loans we have outstanding, there’s no way students are going to pay it back,” Ackman said.