The NEXT BUBBLE JUST BURST: Over $120 Billion In Federal Student Loans In Default

The Next Subprime Crisis Is Here: Over $120 Billion In Federal Student Loans In Default

Whereas earlier today we presented one of the most exhaustive presentations on the state of the student debt bubble, one question that has always evaded greater scrutiny has been the very critical default rate for student borrowers: a number which few if any lenders and colleges openly disclose for fears the general public would comprehend not only the true extent of the student loan bubble, but that it has now burst. This is a question that we specifically posed a month ago when we asked "As HELOC delinquency rates hit a record, are student loans next?" Ironically in that same earlier post we showed a chart of default rates for federal loan borrowers that while rising was still not too troubling: as it turns out the reason why its was low is it was made using fudged data that drastically misrepresented the seriousness of the situation, dramatically undercutting the amount of bad debt in the system.

Luckily, this is a question that has now been answered, courtesy of the Department of Education, which today for the first time ever released official three-year, or much more thorough than the heretofore standard two-year benchmark, federal student loan cohort default rates. The number, for all colleges, stood at a stunning 13.4% for the 2009 cohort. The number is stunning because it is nearly 50% greater than the old benchmark, which tracked a two year default cohort, and which was a "mere" 8.8% for the 2009 year. Broken down by type of education, and using the new improved, and much more realistic benchmark, for-profit institutions had the highest average three-year default rates at 22.7 percent, with public institutions following at 11 percent and private non-profit institutions at 7.5 percent. In other words, more than one in five federal student loans used to fund private for-profit education, is now in default and will likely never be repaid!

And while it is impossible using historical data to extrapolate with precision what the current consolidated federal student loan default rate is, we do know that there is now $914 billion in federal student loans (which also was mysteriously revised over 50% higher by the Fed just a month ago). Using simple inference, all else equal (and all else has certainly deteriorated), there is now at least $122 billion in federal student loan defaults. And surging every day.

Ladies and gentlemen: meet the new subprime.

The article continues:

One can see why everyone in the Federal administration has been so reticent about disclosing the true state of the Federally-funded student loan bubble. Because if one simply assumes the rising default rate has kept constant across all recent cohorts since the updated 2009 number, it would mean broadly speaking, that of the $914 billion in Federal Student Loans at least 13.4% will end up in default. Over $120 billion.

Of course all else is never equal: Federally funded student loans are now increasing at a rate of over $60 billion per quarter. This means that in just about 18 months, the total size of the Federal student loan market will hit $1.3 trillion. Why is that number important? Because that is how big the subprime market was at its peak in late 2007, when everything went to hell and the last credit bubble popped.

...

In other words, the Federal student loan bubble has not only popped, but has all the carbon copy makings of the next subprime crisis. Only when it pops it won't be New Century and Countrywide Financial on the hook: it will be all of America's taxpayers. Remember: these are Federal loans.

And the biggest problem: unlike housing where there is always at least some recovery of collateral, as the house remains, with student debt there is no recoverable asset as the asset is a human being. Granted said human effectively becomes a debt slave courtesy of the non-discharge nature of the student loan, which can not be wiped out even with a personal bankruptcy, but assuming the taxpayer can recover any money using discounted garnished wage flows of what are effectively perpetual(ly discouraged) debt slaves of the system, is simply idiotic.

When you read something like this, it's hard not to believe the BIG RESET is coming.

We have simply failed at this whole governance thing.

Nothing works... It's all getting worse... There are no easy solutions...

The Presidential elections seem utterly meaningless in this context. Whoever wins, will likely be remembered in history as the guy who was unable to stop it all before it finally crashed and burned for good.

Alarmist? I hardly think so.

At best, the gap between the wealthy and the poor will dwarf anything we see today....historically, the stuff of violence and upheaval.

These are dark times, indeed.

We need a miracle....maybe several.

im afraid dark times are truly ahead

reply to post by loam

This means that in just about 18 months, the total size of the Federal student loan market will hit $1.3 trillion. Why is that number important? Because that is how big the subprime market was at its peak in late 2007, when everything went to hell and the last credit bubble popped.

Eye popping stuff. Nice find. I was completely unaware of the severity of the state of the Federal student loan market. This is most likely the first of several large bubbles to burst within the coming months... in my opinion.

Is it really a big enough default to be considered on par with the housing sub-prime crisis?

Good find. Thanks for sharing.

Here is a good short video talking about how College tuition has shot up because the Govt. is pretty much subsidizing it.
And why this is happening. It' about 2 years old, but he nailed it.



Here is another very good one. It's about an hour long, but it breaks down the whole scam of trying to get a college education these day. How the Govt. has gotten involved and to what extent. Everything from textbooks to college sports.

Been expecting this to happen since i saw it on the documentry "Inside Job"

they mention this very thing near the end of the movie.. and they were right.. but, my question is.. how could we have stopped this? You can't bankrupt SL's, it's against the law...or at least you couldn't; and since you can't bankrupt a student load, guess what..

they'll come for your house to pay it off..

Credit bubbles of any kind always irk me because I see them as scams. Total scams. Including this one.

Let me break it down...

I have ten bucks in my pocket and I make a deal with my friend Bob that I'm going to loan him the ten bucks, and that he's going to pay me back a dollar per year. But since I'm being so generous about the low payment, he needs to pay me back for twenty years. Bob agrees because the terms - a buck per year? Totally reasonable.

Oh, I also add in a caveat that if Bob fails to pay me on or before January first, there's a twenty-five cent late charge for that. And there's a ten cent per year administrative fee, to compensate me for book keeping, etc..

Well, twelve years later Bob dies, decides a buck a year is too much, whatever. Now I cry foul. I scream that Bob has gutted me. So I start telling everyone that I loaned Bob ten bucks and that the no good son of a gun defaulted on me.

Problem is, Bob paid me about fifteen or sixteen bucks already. Technically I am several bucks ahead.

Over simplification? Definitely. But this what banks do. This is one of their tricks.

Add that to the unbelievably naive' concept that unregulated markets will "regulate themselves to prices based upon what the market will bear"... and you get this. Kids wanting an education, having to pay tuition that is jacked up way beyond its value, and ensnared in usury, predatory lending, and high interest loan tricks.

This whole mess has now give rise to a consumer response that I see more and more often these days. Deliberate default. I have a relative who deliberately destroyed her own credit and literally broke the law by buying things she never intended to pay for. Her rationale? "The banks are crooks so, screw-em. I got mine!"

There are a lot of people with that mindset. While I cannot at all condone the behavior, I do understand the sentiment behind it.

If we continue to have a nearly totally unregulated market - we're going to sink.

~Heff

reply to post by loam


The biggest difference is that the Feds already own the vast majority of student loans, either directly or through GSO like Sallie Mae.

Banks would stand to lose servicing, but I'm sure there are many kids out there dutifully paying their fines to make the banks happy. Also most student loans cannot be voided under any circumstance. Bankrupt? too bad.. you're indentured for life, you don't get out of student loans.

The REAL risk is if the Fed owns the loans, auctions of the servicing rights, and yet the banks still find a way to wrap the loans into some form of CDO.

there can NOT be a default on Student Loans... as those Loans are not available to be set aside...
a student loan was specially marked by Laws that make recapture certain...at some time...

a student loan balance has priority over any tax refund that person might be eligible to receive,
i expect an outstanding loan balance will soon be reason enough to issue a warrent on the debtor,

if ever you are brought to court, the payback of the student loan could be part of the legal action... then theres' the present reality where Social Security payment are reduced until the full Loan is repaid

the death tax is the final venue where student loan balances might be extracted.

so, the present 1 Trillion in Student Loans outstanding will not be listed as 'in default'
but listed as being in Arrears, late but eventually recoverable because of the unique treatment the Big Banks had Congress pass Laws about just for their protection

Private Student Loan Bankruptcy Rule Traps Graduates With Debt ...

Aug 15, 2012 ... Congress Created A 'Special Circle Of Bankruptcy Hell' ... "There's no reason why
private student loans should be treated differently than ...
www.huffingtonpost.com/2012/08/14/private-student-loans-bankruptcy-law_n_1753462.html

reply to post by St Udio


So the idea is that the federal government would somehow reclaim those loans, no matter what?

Even though there are potentially five students for every job out there, even though their parents have lost their retirement, even though... so are we looking at some kind of forced labor camp system where these indebted students are made to work off their debt?

The agreement you outline is a principal, an idea, the text to make it "impossible" to default. Reality is somewhat different. If people no longer have the means to pay a debt, there is no magical pixie able to point at this agreement and make the money appear.

This system relies upon itself to a certain degree. If such a large number of people stop paying back a loan, the institution has a breaking point. If a bank has a billion in loans on its books and 50% of those loans are no longer being paid back, the bank would collapse. It needs that capital to continue. This system is no different. They cannot simply wait a decade for things to get back to normal and people to start paying again, because by the time they are able to start paying again the institution they were paying it back to has long since sunk.

It's fascinating, because I thought the next bubble was going to be the Credit Card bubble. Plenty of people have been relying on their Credit Cards to fill the gaps here and there, and many of those will not have the means to pay it off. I was looking at the numbers a while ago, but this article does a great job of explaining it -

At $13.5 trillion, mortgages account for the lion's share of the average American family’s debt. Credit cards are the third largest debt category at $803.6 billion. What takes second place? Student loans. Student debt stands at a whopping $1 trillion.

Link

So, first it's mortgages (check) then it's student debt (check) then followed by Credit Card debt.

So I guess we're right on track? We have a mortgage crisis with millions of Americans losing their homes. Now we have this mention of student debts being in default. The next one to hit will be the Credit Card debt when it's discovered just how many out there have been relying on their cards to get by.

We also have to consider that the markets will not care if there are caveats on student debt. You could have all the agreements in place and tell people you will get that money back from students eventually, but the markets don't care what you expect to happen in ten years time. They care about now, and when this student debt bubble is big enough to hit the mainstream you can bet your ass the markets will be spooked.

reply to post by detachedindividual


That was one of the most informative posts I've ever read. Well done. I believe you have hit the nail directly on the head with your breakdown of the situation and your predictions.

reply to post by detachedindividual


how about being in a Prison workforce, paying off a college degree cost at the rate of .15 ¢ hr,
for the nearly $30K debt...(Average Student Loan Debt Now More Than $26,000 - 24/7 Wall St)


source: 247wallst.com/2012/09/27/average-student-loan-debt-now-more-than-26000/


besides.... the Fed stated that the major Big Banks must keep 2 sets of books
one for the prozaic banking activities and the other for the combined Student Loans and the Derivatives Book

these outstanding "Loans' are therefore not Liabilities but are collateral/assets
just as the derivitives are not counted as debts until they are called in. but are listed as assets until such point

it's rather hard to pay a student loan when one graduates to work at McDonalds or other low pay job. i know a few friends who have been crippled by their student debt, yet can't find work in their field that would give them enough cash, to both pay back the loan as well as live on. higher education is almost a scam these days since you build up massive debt yet are lucky to find any job.

the sad part is students are constantly told that if they want a chance in life they have to have an education. in fact the people who are best off are people in prison who have education GIVEN to them. almost makes me want to run out and commit a crime so i can get an education, yet not be trapped by debt.

Originally posted by St Udio
reply to post by detachedindividual

 

how about being in a Prison workforce, paying off a college degree cost at the rate of .15 ¢ hr,
for the nearly $30K debt...(Average Student Loan Debt Now More Than $26,000 - 24/7 Wall St)


source: 247wallst.com/2012/09/27/average-student-loan-debt-now-more-than-26000/

Right, so you're going to spend a couple more trillion $'s on "debtors prisons" like we had a century ago? You're going to pay all those staff to run the labor camps, and you're going to pay another few million men to club and gas protesters all across the USA...

Locking students up for being unable to pay back a debt - through no fault of their own - is not going to do much for civil cohesion. There would be mass protests up and down the country at the mere idea of such an idiotic prospect. And it wouldn't just be students, it would be teachers unions, parents, grandparents, families of future students, and more besides.

This would again admitting that the "American Dream" has become a fully fledged fantasy, and many millions of Americans would be enraged by that thought alone. It would be political suicide for any government to even suggest that.

So, locking people up is off the table. What next? How else does the federal government expect to get that money?

Originally posted by St Udio

 

besides.... the Fed stated that the major Big Banks must keep 2 sets of books
one for the prozaic banking activities and the other for the combined Student Loans and the Derivatives Book

these outstanding "Loans' are therefore not Liabilities but are collateral/assets

edit on 30-9-2012 by St Udio because: (no reason given)

And what were the toxic mortgages?

It makes no difference what heading these things have. They are associated to a business, that business is in debt, the debt will not be paid back, the business collapses. You could call it anything you like, it still doesn't change the fact that it is a debt that will not be paid.

These banks forecast their entire business on what they "expect" to happen. When it looks good for them they'll conveniently move it into one column, and when it looks bad for them they'll move it into another - just as the government does with unemployment figures.

A debt is a debt. It's not going somewhere just because you call it something else.

reply to post by detachedindividual


i am not supporting any of these scenarios, i'm just shining a little light on what the Progressives like
the Øbama handlers have in mind for our future,

agenda 21 indeed... its been accellerating since 1992 and student loans are one form of subjucation
hey, i only borrowed $200 for my college expenses. worked my way through 4 1/2 years at the Gamecock campus...work & study.... as i knew that credit card living was not the way to enter the career world




www.hulu.com...

the president on student loan affordability

reply to post by generik


It is. That is why I haven't finished school. I paid for my associate out of pocket as soon as I got out of highschool, then took time off to save money because I had a bad feeling about taking out a student loan. Now, 5 years on, I have several friends with 20,000 dollars in debt going back to school a second time to become nursing students so they can hopefully get a job they can pay off the debt with. Another friend has 2 degrees and 40,000 in debt. He has job opportunities, good money to at 20 bucks an hour starting, but not that good when you have.. 40,000 in student loan debt.

I am just working my low paying job, debt free, saving, looking for the next thing. I could go take out a loan any time and go to school, but then I'd be trapped with the debt. The government handing out loans inflated tuition to the point that regular people like me can't go to school without taking out a loan. So you have to get a loan and take on debt to go to school in America. Period.

The great irony is that it would cost far less to have free college education and trade schools for those whose grades earn them access, just like much of Europe. Once again, just like denying universal healthcare, Americans shoot themselves in the foot.

Stupid electorate. Not only is free education and free healthcare moral and ethical, it also makes much more economic sense. It's just that dumb Right wing know nothings can't understand that they already pay for people's healthcare today via high insurance costs and they already pay for lack of eduction through crime rates, prison costs, welfare costs, etc.

I don't think the student loan bubble can burst. At least not until loans start averaging around the hundreds of thousands of dollars. Death is about the only way to get out of repaying your student loan. So as long as you're alive, you're going to have to try and repay it somehow.

It looks like there are a few government programs/incentives to help pay it back or loan forgiveness/deferral.

www.ehow.com

There is simply no easy way to get avoid repaying your student loans. But there are options, if you don't mind dedicating two years of your life to work in one of the above fields.

the question is 'how do you get money from people that dont have money?'

slave labor..govt pays to house and feed them while they work for cents on the hour? hmm probably not gunna work...

special programs to help them pay it back...funded by 'grants' from the govt

big corporations giving money to help thier employees who are behind in payments...i doubt that..

no easy way around this one..

and ponder this....for all you have searched for a job lately...it seems that a large portion of corporations want thier employees to have a degree..what kind of degree..ANY kind of degree..does not need to be related to thier field of work..why? wanna make sure the new employee or boss is well into debt so has to hand them thier very own set of 'golden hand cuffs' somebody in debt, i would assume, is less likely to quit a job than somebody has no debt....