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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Yes_Questions's picture



Tell you what, you get that membership fee back in spades at costco tasting samples.

And there's good supply of XXXL size clothing.



Cathartes Aura's picture


because after eating all that cheap'r fud, and those cheeeeezy pizzas, XXXL is a given.

MiltonFriedmansNightmare's picture

Krugman is grinning from ear to ear.

JamesBond's picture

where do i get my free phone?



FEDbuster's picture

As soon as you turn 18, you can apply to get your ObamaPhone.  200 free minutes per month, and discounted additional minutes if needed. 

Not sure if the iPhone 5 is available yet as a free ObamaPhone?  Data plan may be extra, but can be paid for with your welfare EBT card.

Akrunner907's picture

Student loans, the loans you can't get rid of in bankruptcy.  The anchor that will follow you forever.

RafterManFMJ's picture

Another collapsing bubble? Fuck!! Ok, hold on, Imma get my checkbook.

physnomics's picture

Since Fed can bailout the world, Student loan is peace of cake~

koaj's picture

If everyone stops paying, has anyone actually defaulted?


LongBalls's picture

A life of student loan debt with a career in fast food! YES WE CAN!

mind_imminst's picture

The FED will print to cover the student loan bubble, just like all of the other government debts are being monetized.

kaiserhoff's picture

Lordy, I miss Marla.  Such is life.  Well, at least ZH has a new theme song.

alien-IQ's picture

I miss her late night ZH Radio. She had great taste in music. And she would take the occasional request...if it was weird enough.

seek's picture

Indeed @ weird

She loves to run this one during her sets -- in memory of Marla:


Also forgot to mention during my digging over her disappearance, that there's a chain of connections that heavily implied this is the blogger formerly known as marla's current (though seldom active) blog:

alien-IQ's picture

yeah...she had a flare for cool.

seek's picture

Yup. I can't find any evidence that she's currently DJing online anywhere, which is a shame. She seems to be pretty active on twitter -- or at least it's someone that sure sounds like her.

seek's picture

Oh my, we've got a negative nancy in our midst!

I'm going through some of the old radio zero posts in the archive -- one of the shoutcast links is still active and remnants of a playlist of long ago on it, if I find something complete I'll post links.

tkoski6600's picture

Agreed.  I miss ZH Radio, as well.


Gully Foyle's picture


She and the Israelis were the only ones to claim squirt guns were used by the inavding Israeli forces on the Palestinian armada, you know those squirt guns that killed people.

She was only one of two bitching about Wikileaks and Assange just before the first major release.

I guess everyone forgot that.

alien-IQ's picture

We were talking about her taste in music, not her political leanings.

I don't care for Itzhak Perlman's political leanings, but I can still admit he is a brilliant violinist.

Ayn Rand was a evil, heartless bitch, but a very skilled writer.

People are not one dimensional.

DaveyJones's picture

Anorexics are one dimensional. At least they want to be

RacerX's picture

It's amazing how student loans are "non-dischargeable". I'd say 99+% of students to realize that.

Maybe our prez can include "free" student loans along with the free cell phones. That'll be next.

Socialism is great.

alien-IQ's picture

when you consider that employers are now routinely running credit checks as part of the employment screening process, that will put those who got educated in "truly" socialist countries (not the faux socialism so many here take such pride in railing against) will be at an advantage since they will not be burdened with non-dischargeable six digit debt.

So yeah...there are some advantages to true socialism.

Doomer's picture

First there was steel and computer chips, now other countries are "dumping" their subsidized students on us.

LetThemEatRand's picture

Wait.  I'm confused.  I thought from reading many posts here that people who are on their own to educate themselves beyond high school and who are forced to borrow money from bankers to support a consumer driven economy of debt slavery is socialist.  Are you saying that there are countries where the people pool their resources and send people to school so the students have no debt?  What is that -- capitalism?

Dr. Engali's picture

While I agree what we have here is neither capitalism or socialism I disagree with your description of socialism. It's not people pulling their money together, that suggests free will to do so, it is another person taking money from one group of people and giving it to another. A concept completely opposite of freedom.

alien-IQ's picture

here we take money from people and give it to corporations. I'm pretty sure Mussolini would have called that Fascism. And he knew a thing or two about fascism.

“Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power”

Benito Mussolini

Personally, I'd rather have some of my money go towards people who need it rather than corporations that want it.

Dr. Engali's picture

Did you even read my post? I said this is neither capitalism or socialism. Yes what we have here is fascism I didn't think I had to spell it out. I guess I was wrong.

alien-IQ's picture

Of course I read the post...and realized that you did not name it. By not naming it, it's sort of like giving it a pass.

I would rate capitalism above socialism, socialism above fascism and fascism above having red hot needles poked into my eyes.

Buckaroo Banzai's picture

Sorry, it's not fascism either. The fascists didn't have gigantic and elaborate welfare programs like we do ( SSDI, food stamps, WIC, medicaid, medicare, etc.)

No, what we have here is some sort of sick, three-headed monster of socialism, fascism, and cronyism/elitism.

LetThemEatRand's picture

Many do so by free will.  Some are forced.  

It always amazes me that otherwise intelligent seeming people cannot understand that human beings must co-exist with each other.  Lions and Zebras live in a world of true freedom where the strong survive, and the weak are dinner or starve.  Humans have the ability to form societies and work together.  Some humans don't like that concept because they consider themselves exceptional and they believe they will do better on their own.  Other humans are exceptional.   The most successful society in the history of our planet -- modern Western civilization -- is founded on the concept that we are not all equal (notwithstanding the preamble, we all know that some people are smarter and/or more motivated than others, and those people win in our society), but we all deserve an equal chance anyway and we all have equal value and we all deserve to eat even if we don't have the ability to feed ourselves.  Why?  Because no one needs to suffer.  No one needs to starve.  That is success as a species.  You wish to return to the jungle.  You believe you are exceptional because you've done well in a society that you seek to dismantle because you want more for yourself, when you already have more than you could ever need. Funny.

fonzannoon's picture

I think the key LTER is what Lawsofphysics always says....prosecute the fraud. Then we all get along and we all know there are consequences if we take advantage....

LetThemEatRand's picture

The Lions have taken over, while the Zerbras complain amongst themselves about the high death count from the latest hunt.

fonzannoon's picture

Lions is too nice. Maybe parasites?

r00t61's picture

The Lions took over because a bunch of Zebras said, "Here, Lions, we want you to have a lot of power, so that you can protect us from other Lions, and oh by the way, please don't abuse this power that we've given you, pretty please, okay?  Thanks."

LetThemEatRand's picture

No, the Lions have convinced the Zebras that there are too many weak Zebras and the Lions will be nice if we just give them more weak Zebra meat.

A Nanny Moose's picture

Stringing together logical fallacies does not constitute a winning argument. FFS...go have a few drinks, then come back. Please.

Beam Me Up Scotty's picture

No, its more like the fat lazy lions want to lay around and do nothing, while the other lions do all the work.  Then they want in on the feast.

You make it sound as if the reason most people don't have a job is bad luck.  Most people live in shitty situations because of the shitty choices they have made in life.  They were handed equal opportunity, and they decided to throw it away.

Medea's picture

Fuck off. I hope the hordes get you first.

Cathartes Aura's picture


You make it sound as if the reason most people don't have a job is bad luck.

maybe not "bad luck" but the reality of the amrkn ponzi-economy?  you and your currently 16 upvotes that believe it's the "individual's fault" there are hundreds chasing after each reasonable paying job on offer, with corporations doing drug & credit checks for possible job-winners - may want to reel in the rhetoric before things get much worse.

They were handed equal opportunity, and they decided to throw it away.

Dr. Engali's picture

Let me explain why I disagree. I hope you'll excuse me because I've had a little wine tonight. The problem I have with socialism is that a person can not be free. If something is taken from me then you are taking freedom. But if I choose to give something it's because I have free will and I can see the benefits for society. The other problem I have is dependency. I don't mind a temporary safety net... Shit happens and I understand that. But what I do mind is a system where people are propped up indefinitely. I don't feel that's good for society and I especially don't feel it's good for the individual as a person. While I agree a person should and deserves to have an equal opportunity anything beyond that I feel is not the best path because if we say to one group" well you can't do it on your own so we are going to give you a little extra push above everybody else" then you have a system where the most qualified person doesn't get the position. And if we aren't utilizing the most qualified then we aren't going to get the best results.
I hope I'm clear... I probably should have eaten something before having a glass of wine :->

Beam Me Up Scotty's picture

You aren't even slurring, and you are making sense.  Like you always do.  The social safety net has become a hammock for many.  There is never an effort to kick the undeserving off the system when it runs short of money, the answer is to always just raise taxes on the people who work and are responsible.  Think of all the billions that are wasted by our government and there is never any effort whatsoever to eliminate it.  How many educations would the government waste fund?

Dr. Engali's picture

Thank you I appreciate the compliment. The thing that I don't think socialists get is that for us limited government people it's not about greed. It's about what we feel benefits society the most and what is the best allocation of capital. But most importantly of all , it's about what promotes a free society. Dependency, in my view is certainly not freedom, you are beholden to the government. Neither is confiscation freedom, because then you not only have to provide for your family but you have to provide for another. So what happens is, eventually there is not enough income earned and the family may require a second income. This becomes destructive to the family, and therefore destructive to society.

maggiemayok's picture

"The social safety net has become a hammock for many."

Is that yours or did you borrow the phrase? 

LetThemEatRand's picture

 "But what I do mind is a system where people are propped up indefinitely."

Wine is good.  I'm drinking some too.  I agree with many of your points, including that we should cut off the helping hand once we educate and give equal opportunity to succeed, which does not include giving less opportunity to others.

My issue is that socialism by definition includes giving free education and opportunity to those who want to take advantage of it, and I think that's a good thing.

ffart's picture

Yeah, we can just give people all kinds of handouts from the government just for existing and they'll take advantage of it to the fullest and end up as our next generation of doctors and physicists.

I guess you being completely drunk off your ass at all times explains some of the things you post here. I just feel sorry for you now.


DaveyJones's picture

"The most successful society in the history of our planet -- modern Western civilization..."

Thank you God. While I have you attention, can you give me next weeks lottery numbers?