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

Tyler Durden's picture

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.

Another that quietly reported today on the change in the Department of Education's default tracking methodology was Bloomberg in "Student-Loan Default Rates Soar as Federal Scrutiny Grows." Needless to say, it was not impressed, because the new data indicated that there had been a concerted push by all sides to misrepresent the severity of the student debt problem, by over 50%. The "why" is quite simple:

The Education Department has revamped the way it reports student-loan defaults, which the government said had reached the highest level in 14 years. Previously, the agency reported the rate only for the first two years payments are required. Congress demanded a more comprehensive measure because of concern that colleges counsel students to defer payments to make default rates appear low.


“Default rates are the tip of the iceberg of borrower distress,” said Pauline Abernathy, vice president of The Institute for College Access & Success, a nonprofit based in Oakland, California.


On the stump, President Obama has touted an executive order that eases the process for applying for a loan program that lets students make lower payments tied to their income -- easing their burden and making it less likely they will default.


Under the new three-year measure, colleges with default rates of 30 percent or more for three consecutive years risk losing eligibility for federal financial aid. Schools can also be barred from the program if the rate balloons to 40 percent in a single year. The sanctions don’t take effect until results are released in 2014.

There it is again: a mega-government which gives amply with one hand, and yet with the other skews the incentives in the system to represent reality as far better than it truly is. One way to underwhelm reality and to soothe the blow of the true extent of the popped student loan bubble was using a shorter data cohort.

Some for-profit colleges encourage students to defer
payments in their early years, in an effort to keep down default rates that could jeopardize their federal funding, according to a report by the Senate Committee on Health, Education, Labor and Pensions released in July.


The report accused for-profits of using the tactic to manipulate their default rates. It singled out the role of SLM Corp. (SLM), the largest U.S. student-loan company commonly known as Sallie Mae. A subsidiary, General Revenue Corp. counsels for- profit colleges on keeping down default rates. University of Phoenix, owned by Apollo Group Inc. (APOL), is a customer, according to the Congressional report

Whether or not the reason for the government to demand more accurate data was to scapegoat the private sector yet again, what it did instead if expose just how deep the student loan hole already is. Because now that we know the revised default data, we can put it together with the recently revised as of a month ago revised total student loan notional number. Recall from the Fed:

The revisions to the data are fairly substantial: as of our August report, 2011Q2 student loan balances were reported at $550 billion. We now estimate that student loans outstanding in that quarter (2011Q2) amounted to $845 billion, $290 billion or 53.7% higher than we reported earlier. These previously excluded loans were also missing from the total debt outstanding; as a result, our estimate of total debt outstanding in 2011Q2 is also revised upward by $290 billion (2.5%).

This is what student debt looked like a month ago when we first reported the data:

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. From Responsible Lending:

As can be seen on the table above, 20% of all subprime mortgages was then expected to default (the ultimate number ended up being far higher). Note that as mentioned above, already over 22% of for-profit student loans are in default.

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.

We give Bernanke at most 2 years before everyone is aware of the true extent of not only the student debt bubble, but that it has already popped, at which point student loans will be the next "asset" to be monetized by the Federal Reserve.

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Tom Green Swedish's picture

The financial system and The Government are all one big pile of crap.  There I summed it up.  You don't have to give us anymore details.

Victorio's picture

Bite your tongue! The financial system and The Govenment is a magnificent criminal enterprise.  They're the most efficient purveyors of fraud, murder, and theft this world has ever seen. They are a glimmering beacon of evil. They are the ultimate bastion of........well, you get the idea

mick68's picture

QE3 just went from 40bn per month to 60bn per month.

Sam Clemons's picture

Yea, we need it to be only two months instead of three months to bailout the banks for ALL of these bad loans.  Don't want to have a bad quarter.

Mark Carney's picture



-Paul "MOTHER FUCKIN" Krugman


r00t61's picture



Ben Bernanke, 3/28/2007: "The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

Ben Bernanke, 12/10/2012: "The impact on the broader economy and financial markets of the problems in the student loan markets seems likely to be contained."

Ben Bernanke, 4/15/2014: "The impact on the broader economy and financial markets of the problems of the implosion of the US dollar seems likely to be contained."

Ben Bernanke, 6/3/2045: "As part of my deathbed confession, I admit, I don't actually know anything about anything.  Joke's on you, though, losers."

iDealMeat's picture

HEY....  ALL YOU SHEEP SHITHEADS!!!  Guess what the first order of business will be for #1(Whoever) is predetermined to take the oval orifice position.. 


The debt ceiling!!  remember that??  yeah..  gotta jack it up..  because nothing else matters..

FEDbuster's picture

Food and ammo, then gold and silver.

BTW, can they rescind the degrees of those in default (you didn't earn that)?  Or just attach the wages (if employed) of the debt slaves?

rocker's picture

Didn't I hear a canidate say that the students are uplifted. Now the have to wait for the yellow rain so they can grow green shoots.

Surly Bear's picture

It's not like these folks won't pay it back, I mean, look at all the new revenue agents PPACA will bring to the dynamic.

AldousHuxley's picture

slaves in Africa have nothing


college in America have $100,000 DEBT!!!



Time to move to Africa.


Urban Redneck's picture

The edumacated debt slaves perhaps should have read the Constitution better- as neither slavery nor involuntary servitude is outlawed under the 13th ammendment.  It only takes an act of Congress to the modify federal sentencing guidelines and the debt slaves can actually legally be monetized as indentured servants (or property) of their creditor(s).   Thank you Joe Biden, personal bitch of the BofA board, for rewriting the rules so that Student Loan debt cannot be discharged through bankruptcy.  Too bad all those edumacated debt slaves probably bought your BS about increasing consumer protection.  Thank God I paid for my college out of my own savings.

13th Ammendment

Section 1. Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

Section 2. Congress shall have power to enforce this article by appropriate legislation


malikai's picture

Sounds like great opportunity for the good folks in the "corrections" business..

FEDbuster's picture

The for profit prison corporations are now demanding minimum occupancy levels in their contracts with the state.  It will be up to law enforcement to keep the prisons full, or the kick backs will stop flowing.

11b40's picture

Much, much more  opportunity for the debt collection business.

Our local Tea Party representative is actually a big-money corporate shill.  He sponsored legislation to allow telemarketers and others to call your cell phone, even when you are billed for their calls.  The financial industry heavily supports this iniative.

It did not pass, but just wait.  It will come up again and again until they can shove it through. 

Specific Organizations Supporting H.R.3035
  • ACA International
  • Air Transport Association
  • Consumer Bankers Association
  • Coalition of Higher Education Assistance Organizations
  • Edison Electric Institute
  • Education Finance Council
  • Financial Services Roundtable
  • Housing Policy Council
  • National Association of College and University Business Officers
  • National Council of Higher Education Loan Programs, Inc.
  • Student Loan Servicing Alliance
  • Student Loan Servicing Alliance Private Loan Committee
  • The Clearing House
  • SoundBite Communications Inc.
  • American Bankers Association
  • Mortgage Bankers Association
  • U. S. Chamber of Commerce
Interests that oppose this bill:
escargot's picture

When you're in default, you cannot get 'official' copies of your degree or transcripts, so they effectively do 'rescind' your degree depending on whether or not you're applying for a job that wants the official documents.  Trust me...I know....

They also take your tax returns eventually, but I think it happens after like 3 or 4 years of being in default.  If you're smart, you call the gubmint around the middle of December or January and tell them you want to pay your defaulted debt; you get on a cheap-as-possible payment plan; you make a couple of payments to get back in semi-good standing, then you get your tax return, and then stop paying again.  Trust me....I know...

I'd honestly love to just pay those fucking loans off and get on with my life, but it's kinda difficult when you're living paycheck to paycheck even WITHOUT forking out several hundred dollars a month for the loan payments. 

AldousHuxley's picture

Pretty soon college kids are going to lose it and may go postal against college administrators.


college administrators usually have degrees from much shittier places.



Cathartes Aura's picture

given that it's been generally agreed here that degrees are worth-less pieces of paper, why rescind?

the "you didn't earn that" line - sure, degrees are purchased with student loans, but there are some people who have put in the time & effort to earn their degree, but cannot use them in employment because of the state of the world economy - why continue to stomp on them?

as for "attach the wages" - no wages, no attachments - voila!  and from what I've read, a defaulted student loan means no "social security" bennies. . .cue hollow laughter. . .

caconhma's picture

The USA is a banana subprime-rate republic with financial and security/military oligarchy in charge.

Now, America is a "subprime land" where it doesn’t pay to be honest or work hard. The best way to make a good living is to steal from taxpayers and/or the government. The US financial oligarchy and government employees are really good on it. The only question to ask: how long will Chinese subsidize and pay for it?

For the last 10 years, America has used its military might to threaten, intimidate, and invade other countries to support its unsustainable level of living but, as Iraq, Afghanistan, Syrian, and Iran have shown, this is coming to the end. US military is not that mighty any more. It is just a matter of time when America will have a direct confrontation with a strong adversary following a major American retreat from all over world.


eaglefalcon's picture

Unfortunately, the impact on the broader economy and financial market of the fecal matters in Bernanke's brain is NOT contained. That why the whole thing smells like crap now

Parrotile's picture

Optimistic to expect Bennie to still be alive in 2045?? With the obvious love for him and his "friends" awash through ZH (and other sites too don't you know!) I was rather expecting him (and others) to be acting as lamp-post decorations within no longer than the next decade!

Redhotfill's picture

500+  House and senate members and a few other choice persons decorating light poles on Constitution Ave.....  Thats the change you can believe in!

Mareka's picture

No wonder senators Hagan & Corker have been working so hard (on behalf of their handlers) to pass the covered bond bill, allowing, among other things for student loan debt to be rolled into marketable securities guaranteed by the FDIC.  So far the FDIC has not played along.  Write garbage loans then stuff the losers into somebody's pension fund.

DaveyJones's picture

let's see, for the young, make education unaffordable & the job market unreachable. For the old make the markets untenable. I'd say they pretty much have this covered 

grid-b-gone's picture

Easy college loan money has allowed for constant building, typically $100 mil - $200 mil projects at larger universities.

No wonder foreign students want to tap into the infrastructure of U.S. higher education. It would be prohibitive to replicate in almost any other country.

One can always tell a bubble when the spending gets stupid, though. Ohio State president's $64K bow tie expense since 2007.

Bonds are nice, but student loans should be 0% coming directly from the Fed/Treasury for math and science course tuition with international end demand. Some 2-yr technical degrees, like CNC machine training, should be covered. Degrees with low market demand and room and board expenses should not be backed by government funding.

Big banks and now five administrative middlemen with political connections (Aspire, etc) are too involved in writing the legislation. That makes the program a subprime bubble.

Cathartes Aura's picture


Ohio State says the bow ties are props or symbols of the university and its president who expenses a total of $7.7 million for that same period.

save a lamp post for Mr. Gee, and maybe one for his pal Mr. Lynch (these stories just get more entertaining as we go, right?)

Ohio State spokesman Jim Lynch told The Daily News, "It's a nice icebreaker. The freshmen show up on campus and President Gee hands them a [bow tie] cookie. They love it. The students love it."

Sheriff Douchenik from AZ's picture

End demand driven education? That would require 100% upheaval in the current system of primarily liberal academics.

economics9698's picture

And the crowd wondered why their favorite pizza at Sam’s Club increased 10% in price this week.

LetThemEatRand's picture

It's all of those damned government contractors.

ParkAveFlasher's picture

Actually, the problem is that a very low number of pizzas actually pay taxes.  Most pizzas just live off the system, parasitically, producing nothing. 

Many pizzas also engage in speculation.  This has a lot of bad side effects.

And that's your MSM analysis for Friday.  Have a pleasant tomorrow. 

Gully Foyle's picture


The vast majority of pizzas posting here have never produced anything or had a job producing anything.

And they never will.

All those hypocrites who read Rand and consider themselves candidates for Galt's utopia, would actually be shat upon by Rand herself.

The problem I have with your parasite statement is those who game the system understand it better than those who complain about the system being gamed. I consider it jealousy on the part of those lacking the wit to capitalize on a flawed system and deriding others for doing so.

Really you are either a victim or you aren't. Victims have a mentality where they choose to blame others for their own flaws. They see everyone from Jews to unwed mothers as the source of all their ills.

It's always simpler to blame others than to take charge of your own life. Then you can never claim to your failures because it always is the fault of the other guy.

fonzannoon's picture

you write in bold letters because you have a small penis. 

kito's picture

does one become a flasher if one has a small penis?.............and why he would pick park ave is beyond me, way too many cameras and sharp shooting (not) nypd infantry.........................

fonzannoon's picture

This is why you are always one step ahead of me. I had flasher and small penis and I could not throw it all in there together like you did. It does still leave the confusion of why the small penis exhibitionist would choose park ave....

kito's picture

not really a step ahead, just had absolutely nothing to throw out there except for an inane little kids are still running wild at this hour...not good.........i need another pumpkin ale.................

FEDbuster's picture

"And the crowd wondered why their favorite pizza at Sam’s Club increased 10% in price this week."

I haven't noticed that, but I did see that Sam's dropped the rotisserie chicken back down to $4.98 (same as Costco's price) from $5.99. Fifty pound bag of rice $18., 50 pounds of popcorn $21. now's the time to stock up.

Mitzibitzi's picture

Jeez, you would struggle to get 50Ibs of rice in the UK for $18, these days! I managed 25kgs (55Ibs, give or take) in LIDL a few weeks ago for £13.99 ($22.65) but that's as close as I've managed recently.

petolo's picture

Yes, indeed. Just a few tips from my own experience. Old freezers and clean 50 gallon drums make excellent storage units but tend to become damp over time. Place a small 4 watt lightfixture at the bottom,allowing some space for air circulation. Just leave the drum/freezer open a crack and that will prevent any mould and spoilage. I,m pulling for us, we,re all in this together except for politicians, employees of the Fed,Banksters  and other half-wit degenerates who have anything to do with Gubberment.

FEDbuster's picture

All my grain gets stored in five gal. buckets, with sealed mylar bags using the dry ice oxygen replacement method prior to sealing.  We are now eating rice that was stored this way four years ago, no bugs, no taste difference.

Cathartes Aura's picture

fifty pounds of (GMO'd) popcorn for only $21 hmm?  no popcorn for the feedlots, but they're getting all the stale candy - hopefully someone is showing them a great movie to go with it. . .

Food Inc.


SafelyGraze's picture

I have to write in bold now?

just one more example of the arbitrary fascistic rules increasingly imposed on the zh community



akak's picture




AND LOTS OF "......"!!!



Acidtest Dummy's picture

Just the FAQ?
Tylers' army subtracts one from infinity. Is it a victory?

malikai's picture



DaveyJones's picture

you forgot the word conspiracy

Wraithlord's picture

He also forgot to underline.

This is how it's done....Bitchez!!!

mendigo's picture

so you are anouncing that you pay to enter a store to shop?
sigh....there really is no hope