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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Hulk's picture

5,4,3,2,1... Hmm, looks suspiciously like a countdown, maybe not so lucky numbers after all...

samcontrol's picture

So what is the dif. between socialism and paying taxes ?
What if you live in a socialist country and pay no taxes, what does that make me?

Honestly , you had more like a bottle than a "glass" ..

BidnessMan's picture

The problem with Socialism is eventually you run out of other people's money. Margaret Thatcher

Cathartes Aura's picture

the problem with Thatherism is you eventually run out of North Sea oil, and state assets to sell off. . .

piceridu's picture

We have to come to grips with what crony, government partnered capitalism does to the world. There’s no end to the brutality of the partnership between corporations and governments. And no end in the amount of devastation they have reaped upon the world in order to boost balance sheets.

The majority of the world’s population is living in squalor thanks to this thieving, extractive government partnership. The destructive score sheet tallies the amount of human beings, communities and resources that have been destroyed.  What we have to understand is that there’s no way to control this power or partnership. At the point we are now, it’s self propagating.

californiagirl's picture

"forced to borrow money"

Hmmm.... I had a job and zero debt upon graduation.

TWSceptic's picture

Wait.  I'm confused.


That, and clueless. Education actually used to be cheap and of higher quality, that changed the moment government decided to interfere with it. So instead of capitalism, we have socialism now, making education worse and far more expensive than it needs to be. This is not even a point of discussion but perfectly demonstrable.

It's funny how everything you see wrong in this world is precisely the result of what you see as the solution. I have to assume it's some malfunction in the brain that inhibits you to make the required connection. Or maybe it's just the public school system?

californiagirl's picture



That language is only in there to appease the sheeple. Once they start defaulting in earnest, they will be "discharged" into the taxpayers' pockets.
ShortTheUS's picture

For-profit institutions had the highest average three-year default rates at 22.7 percent


I AM IN SHOCK!!1!!!!

CClarity's picture

And with employers running credit checks on job applicants . . . these students are double "f"ed.  Student loan defaults will increase, but the debt is never forgiven.  So much young talent unable to climb above the debt they incurred trying to build a future following the axiom implored on education education.  A sad day in America.    The Fed can buy all the Sallie Maes but it won't fix the problem.

alien-IQ's picture

The goal was never "education" was "debt serfdom". And by that measure, it has been a smashing success.

CH1's picture

The goal was never "education" was "debt serfdom"

Don't forget indoctrination.

alien-IQ's picture

yeah, but they do that for free. It's called k-12.

if you dare to want to know more, you must become a debt slave.

WillyGroper's picture

Free k-12?

Is that why the taxes on my house go up 5% annually even though the assessed value has dropped roughly $3K?

matrix2012's picture

One should learn FROM JOHN TAYLOR GATTO !!


TRAGEDY AND HOPE - Commentary and Analysis: The Ultimate History Lesson  by JOHN TAYLOR GATTO

(16+ hours / mp3)

The Ultimate History Lesson with John Taylor Gatto was released in audio format during October and November of 2011, featuring the original 5-hour interview with John as well as an additional 11-hours of commentary and analysis, including almost 1000 footnotes, books, videos, and other references provided. These conversations were published as Peace Revolution episodes 041-045. For the film version of The Ultimate History Lesson, click this link. You can also access the Bibliography as well as the Sourced Transcript.

Ways You Can Effectively Help

Learning is the Answer. What's the Question?

Since 2006, we have created over 250+ hours of educational information, of the highest-academic quality, and we have presented it for FREE, to millions of individuals around the world; many of whom are desperate to encounter and integrate such information.

This site is free, please consider helping us; so that we can continue producing projects which enable Cognitive Liberty.

Tragedy and Hope / Purpose (Form and Function)

Tragedy and Hope provides a portal through which individuals can discover, identify, and integrate useful tools, resources, and activities which stimulate and fortify Cognitive Liberty, providing primary sources, research, and educational methods which facilitate consciousness.

More here:


His books include: 'Dumbing Us Down: The Hidden Curriculum of Compulsory Schooling' (1992); 'Underground History of American Education' (2003); 'Weapons of Mass Instruction' (2008).

More about John Taylor Gatto:



"Children who know how to think for themselves spoil the harmony of the collective society that is coming." -- John Dewey (1859-1952), 'father of progressive education.'

Ray1968's picture

So what you're saying is that I shouldn't have enrolled in the University of Phoenix Dropout-to-PhD program?

RSBriggs's picture

Christ - how can you afford it?  For just the the High-school-grad-out-to-bachelors parts it's almost $40k

RiverRoad's picture

Thank God all those kids have jobs waiting for them upon graduation so they can pay their loans back.

surf0766's picture

I am sure glad I do not work for a company that supports Higher Education .

Yes_Questions's picture



Can the next round of  QE bet set to MUSIC?

q99x2's picture

Wondered why my check was late. Where's the Rothschilds when you need them. There goes my Obamaphone.

surf0766's picture

If I help him he gonna help me

tradewithdave's picture

Finally some justice from the CFTC.  Oops... my bad.  What was I thinking?



SelfGov's picture

Peak education during a deep trough of skill and ability.

They'll learn...

northerngirl's picture

That is easier said then done, many employers today seek candidates with at least an AA for entry level jobs.  Some cases I've seen help wanted ads for entry level bookkeeping positions that require a four year accounting degree.  These are not CPA positions, they are entry level bookkeeping positions.  I realize this is a heavily regulated industry, but in all reality it does not take a rocket scientist to differentiate between an asset and liability.  I'm not disagreeing with you necessarily, but the reality is in many cases without some sort of college education many will not even be considered for an interview.

djsmps's picture

I paid off my student loans, after defaulting on them. These people better too. I'm not paying for them.

LMAOLORI's picture



You already are for a portion of them and they want you to pay even more.

Obama Student Loan Forgiveness

About Obama Student Loan Forgiveness
Earlier in his presidency, President Obama announced a student loan forgiveness plan one that has become known as the Obama student loan forgiveness program- for students who were unable to complete their student loan payments or had already completed a significant part of their payments for a long period of time. The Obama student loan forgiveness program automatically clears the remaining debt of anyone who has made regular payments on their federal student loans for a minimum of twenty years. People in military service or who are working in other government departments might have their debts cleared even earlier than that as per Obama Student Loan Forgiveness.


It's been such a success they are running out of YOUR tax money

Student Loan Forgiveness Programs Short On Funds

On March 8, Congressman Hansen Clarke (D-Mich.) introduced H.R. 4170, the Student Loan Forgiveness Act of 2012

RockyRacoon's picture

Now it's clear why the "middleman" was eliminated and the gov't took on the debt burden.  The financial institutions would have otherwise been saddled with these defaults.  Gov't "guarantee" or not.  The ostensible reason was to lower the costs to students by lowering the rates.   Uh-huh.  It was to unload the loans onto the gov't.  See?  Things make sense if given time to ferment in the mind.

Beam Me Up Scotty's picture

Win/win.  Financial institutions don't get defaulted on, and Obama is a hero to the kiddies, and gets their votes by none other than buying them.

LMAOLORI's picture



yup a two fer the 1% is doing great under obama


Wealthy Americans Gain in Obama Term


since Obama took office in January 2009, wealthy Americans have continued to pull away from the rest of society. In the aftermath of the recession, income inequality in the U.S. reached a new high in 2011, Census Bureau data show.

Even as the president has decried the hollowing out of the middle class, the fortunes of labor and capital have diverged on his watch. Quarterly corporate profits of $1.9 trillion have almost doubled since the end of 2008, while workers’ inflation- adjusted average hourly earnings have declined.

“At the very high end, people got a whole lot wealthier whereas income stagnated at other levels,” said Anne Mathias, director of Washington research for Guggenheim Securities LLC. “Fifty years ago, people talked about the other half, how the other half lived, and now we’re talking about the other 1 percent.”

Bank profits rebounded in third quarter

DaveyJones's picture

I've never seen such a losing win

alien-IQ's picture

I'm looking forward to the onslaught of lawsuits from students filing charges against schools for teaching them fraudulent information.

I think they've got a fairly air tight case. Let's face it...there is no lack of evidence.

fonzannoon's picture

These kids are going to suffer. Their parents are going to suffer.There will be a point where parents will not allow the kids to take out loans and waste 50k a year on college. Kids will go to trade schools, community colleges or right into the family business if there is one. College costs will implode in the next ten years.

Dr. Engali's picture

I'm sure the government has a plan for that. They will let them work it off by " serving their country" in one fashion or another. It's easier than a draft.

nmewn's picture

Its not like we didn't try to tell them...ultimately, it has always been about our labor & our consent to its use.

I smell bacon...BLT night ;-)

fonzannoon's picture

nmewn I can tell you that where I am, no one tries to tell them (or very few). They still get pushed into these debts by people thinking they are doing them a favor. People like me get my voice drowned out.

centerline's picture

Same here.  I have screaming for years about this (and other subject so obvious to folks around here).

Society at large is brainwashed.  When it comes to education, people are played for their fears that their children will not "live the American Dream."  So, they readily cash out thier retirement funds and sign on the dotted line for more.

They know the system is broken - but won't admit it.  And nothing you and I can do will get them to "think critically."  They are petrified for thier children.  And society self-reinforces the whole thing.  Some day, these parents and kids are going to look back at what happened - and they are going to be pissed off like never before.  This bubble has the potential to be a real show stopper.  I have wagered before that it very well might be the last debt bubble that folks willingly walk into.


RiverRoad's picture

Ah but it might become handy if a draft becomes can do what you want with a debt slave.

Urban Redneck's picture

In the US, military service is indentured servitude (albeit a usually voluntary practice).

The very first piece of paper you sign in the term of indenture.

And once you are an indentured servant of the State, the very next peice of paper you sign is the surrender of all the protections, priveledges, immunities, and rights afforded to US Citizens (and all other human beings) under the US Constitution...

However, given the preponderance of the fat, lazy, uneducated (w/ or w/o papers to the contrary), and unskilled among the populace, perhaps more should give it a try...

A Lunatic's picture

I tried to get my kids into a trade school in order to develop a skill set now and pursue college once they have been around the block at least once. Unfortunately they refuse to listen and will choose instead to do the same shit everyone else does.

BidnessMan's picture

Already at that point with mine. 2 of 3 are out with degrees and zero debt. The youngest still in college knows there will be no loans, and no funding from me if he 1) gets bad grades, or 2) majors in a useless degree. Why parents support bad grades and useless degrees is hard to understand.

LoneStarHog's picture

So...has Bernanke paid off his student loans for his worthless degrees in Economics and the History of The Great Depression?

alien-IQ's picture

School didn't cost a fortune when he went.

Hell, it didn't cost a fortune when I went in the mid 80's. At least it was nowhere near what it cost now. I took no loans at all.

rpc996's picture

The notion that everyone deserves a higher education is foolish. It's a big lie, colleges are turning out waves of indebted unemployable grads into an abysmal economy with no prospect of a real career.

Radical Marijuana's picture

A principle of democracy is the education of all citizens.

America has stopped being a democratic republic, and instead become a fasicst plutocracy. Therefore, citizens are NOT wanted! Only bullshit consumers are wanted. Every citizen deserves an education, in order to be a citizen. However, after the powers of government have already been 99% privatized, then citizens have no more role to play. This became a vicious spiral. The triumph of lies and violence destroying the American repulblic has been picking up speed at an expontially accelerating rate. Therefore, the primary role of Americans, to be citizens, has atrophied down to almost nothing!  That is the primary way that everthing was driven to get even worse, while freedom and democracy transformed into debt slavery, providing a fake education, which fits inside what is now a totally fake democracy, run by an out of control fiat Emperor.

nmewn's picture

Save us Barry!!!...we did what you asked!!! was an "ïnvestment"

Help Mr.Wizaaard!!!...Haaalp!!!

WhiteNight123129's picture

Fuck, more shit sandwhich...


Mr.Bigfoot's picture

Are federal student loans securitized?