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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nmewn's picture

Yes, you owe your labor to the company store.

Change...its not just for breakfast or individually positive anymore.


kaiserhoff's picture

Brother, can you spare a (pre-1962) dime????

nmewn's picture

Plus a 800k of them...and Change ;-)

A Nanny Moose's picture

What's wrong with '63 and '64?

Mr.Bigfoot's picture

Is there a triple levered inverse ETF for this? Anyone?

dick cheneys ghost's picture

Time to go LONG the underground economy.............its where all the action is, because if wall st and the whores in wash dc dont play by the rules, why should anyone else?


fuck em i say, cause this is true, if you havent tried life in the underground economy, well you are missing out on the best that life has to offer and quite frankly, we are all going to end up there anyway, once this whole shithole implodes.............might as well get a head start

cynicalskeptic's picture

Government may not be good at collecting taxes from corporations and billionaire- drug dealers can launder hundreds of millions with no problems -   but they go after flea market sellers and damn near every other 'little guy'...  it's getting harder and harder to run under the gov's radar....  

We're seeing a massive 'redistribution' of wealth from the general population to government - and from government to the wealthy....    forget the propaganda about 'welfare' and food stamps - the poor pay a disproportionate share of their income in sales taxes and other gov taxes and fees     look at the trillions going to banks and Wall Sgtreet - the massive government spending via no-bid contracts and directed spending.... 

holdbuysell's picture

Krugman's gravy train in academia is nearing its end.

nmewn's picture

And guess who has the alley covered ;-)

matrix2012's picture

@ BigDuke6 thx for the yt vid

what did i sense...

the same countrymen were seen fighting each other intensely... while the diabolical puppet masters watching comfortably in preying smile

i think the folks should prepare better if they go for the next demo...otherwise they're just the easy meat for the fierce batons.


120 billion. A fart in a windstorm.

Every President through modern history has spent money like their hair was on fire. No exceptions. And, Congress approved an endless litany of unbalanced deficit spending budgets year after year. They didn't mind creating slavery for the tax payer, and printing free money compliments of the Fed for their banker / Wall Street buddies to bail them out of the mess created by the miracles of deregulation. lobbying, and corruption. All accomplished regardless of which party or President was in charge. They are all cut from the same block of cheese, and they are all culpable.

 I just hope we survive the end result of having criminals running the country for decades. Put your money in something tangible, because the dollar is going to continue to tank, resulting in way more inflation. And, banks may not survive the firestorm of margin lending, credit default swaps, and derivatives created that exceed 250 quadrillion dollars in total  - more money than the gross domestic product of the entire planet for decades. Then, for all you number crunchers out there, some sobering statistics below.  

The Federal Reserve is neither Federal nor a "Reserve". This private bank run by the "Bank of England" has been stripping the US of its assets since the days of Andrew Jackson.  If the $16,000,000,000,000.00 given away secretly, since 2007, to the member banks isn't reason enough to overhaul our entire government financial system then our country is doomed to financial failure. You won't read this in the mainstream media....but it may emerge in the coming elections. Read about this first ever audit of the Fed and understand why we are in such trouble. 

Tuesday, September 27, 2011 First Ever GAO Audit Of The Federal Reserve (You can click on the site and read the report).

The first ever GAO audit of the Federal Reserve was carried out in the past few months due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent Senator, led the charge for a Federal Reserve audit in the Senate, but watered down the original language of the house bill (HR1207), so that a complete audit would not be carried out. Ben Bernanke, Alan Greenspan, and various other bankers vehemently opposed the audit and lied to Congress about the effects an audit would have on markets. Nevertheless, the results of the first audit in the Federal Reserve nearly 100 year history were posted on Senator Sanderâs webpage earlier this morning.   (Summarized below) What was revealed in the audit was startling:

$16,000,000,000,000.00 (TRILLION) had been secretly given out to US banks and corporations and foreign banks everywhere from France to Scotland. From the period between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the worldâs banks, corporations, and governments. The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest. Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailout is obvious the American public would have been outraged to find out that the Federal Reserve bailed out foreign banks while Americans were struggling to find jobs. To place $16 trillion into perspective, remember that GDP of the United States is only $14.12 trillion. The entire national debt of the United States government spanning its 200+ year history is only $14.5 trillion.

The budget that is being debated so heavily in Congress and the Senate is only $3.5 trillion. Take all of the outrage and debate over the $1.5 trillion deficit into consideration, and swallow this Red pill: There was no debate about whether $16,000,000,000,000 would be given to failing banks and failing corporations around the world. In late 2008, the TARP Bailout bill was passed and loans of $800 billion were given to failing banks and companies. That was a blatant lie considering the fact that Goldman Sachs alone received 814 billion dollars. As is turns out, the Federal Reserve donated $2.5 trillion to Citigroup, while Morgan Stanley received $2.04 trillion. The Royal Bank of Scotland and Deutsche Bank, a German bank, split about a trillion and numerous other banks received hefty chunks of the $16 trillion. ****  

When you have conservative Republican stalwarts like Jim DeMint(R-SC) and Ron Paul(R-TX) as well as self-identified Democratic socialists like Bernie Sanders all fighting against the Federal Reserve, you know that it is no longer an issue of Right versus Left. When you have every single member of the Republican Party in Congress and progressive Congressmen like Dennis Kucinich sponsoring a bill to audit the Federal Reserve, you realize that the Federal Reserve is an entity onto itself, which has no oversight and no accountability.  

Americans should be swelled with anger and outrage at the abysmal state of affairs when an unelected group of bankers can create money out of thin air and give it out to megabanks and super-corporations like Halloween candy.  

The list of institutions which received the most money from the Federal Reserve can be found on page 131 of the GAO Audit and are as follows:

Citigroup: $2.5 trillion($2,500,000,000,000) Morgan Stanley: $2.04 trillion ($2,040,000,000,000) Merrill Lynch: $1.949 trillion ($1,949,000,000,000) Bank of America: $1.344 trillion ($1,344,000,000,000) Barclays PLC (United Kingdom): $868 billion* ($868,000,000,000) Bear Sterns: $853 billion ($853,000,000,000) Goldman Sachs: $814 billion ($814,000,000,000) Royal Bank of Scotland (UK): $541 billion ($541,000,000,000) JP Morgan Chase: $391 billion ($391,000,000,000) Deutsche Bank (Germany): $354 billion ($354,000,000,000) UBS (Switzerland): $287 billion ($287,000,000,000) Credit Suisse (Switzerland): $262 billion ($262,000,000,000) Lehman Brothers: $183 billion ($183,000,000,000) Bank of Scotland (United Kingdom): $181 billion ($181,000,000,000) BNP Paribas (France): $175 billion ($175,000,000,000)  



Dr. Engali's picture

It may be a fart in the wind but somewhere in all these farts that one dollar in missed payments will push us over the edge.

centerline's picture

Exactly Doc.  It is all about the flow.  The stock (level) is just measure of the damage that will be incurred when the flow is impaired.

Shit, it might as well be $160T or $1600T if the rate is 0% and the cash doesn't slam velocity.  But, at some point it will get dragged into the light.  Rest assured it won't be idle forever.  It will eventually find it's way to deposit bases.  Chance are this will happen when the trigger point in the flow is reached.  The whole circular firing squad of counterparty exposure will light up overnight.

So, the more they pump the system, the more likely we see a hyper - flationary outcome.

BigDuke6's picture


The purpose of almost all saving is retirement.

Nobody has had to worry too much about retirement over the past 30 years because governments were rich, splashing borrowed money about, and the markets were delivering handsome returns, both on everyone’s main asset – their house – and whatever they might have stashed in a pension fund.

As a result, savings rates collapsed and consumption grew every year, supporting global output and employment.

You work for 40 or 50 years, raise a family or not, then run out of steam and have to stop working and then you have to live on a combination what you’ve managed to save and what the state or your employer will give you. And it used to be that you died pretty fast after that so it wasn’t too expensive. But now that’s changed.

All good, except what are we going to be living on when we’re 90? 

The 20th century was a golden age for old age pensions. They started in 1889 in Germany, although it kicked in at age 70, when average life expectancy then was 45, so it wasn’t an expensive scheme.


Everything went along fine until the 1980s.People wanted free health systems and free education, and at the same time, as a result of the Thatcher/Reagan supply-side, neoliberal economic revolution, taxes were cut. The result of that was a steady, 30-year rise in debt.

And we, the people, will pay for the lot.

Your rogues gallery up there wont.

Urban Redneck's picture

Andrew Jackson & Calvin Coolidge would beg to differ-

"Every President through modern history has spent money like their hair was on fire. No exceptions."

You could slice "modern" history at the internal combustion engine (or the establishment of the Federal Reserve) to exclude Jackson, but to exclude Coolidge you would really have to narrow the focus to the contemporary idiocrats.

WillyGroper's picture

Systematic rape by instrumentation with a mace and military precision.

benbushiii's picture

There is another side to this story.  The debts incurred by the Student Loans perpetuate a bloated / inflated education system.  Over paid professors with tenure that cannot be fired.  Inflated retirement plans paid for on the debt serf students who have bought into the concept that they must have the higher education in order to reach their dreams.  Another way of creating a spread similar to mortgages to prey on the innocent.  Education costs keep rising as real estate did since levered $s are chasing a myth.  The reason they are non-dischargable in BK is there is no underlying asset as in a real estate loan, just a pound of flesh.

Tyler Durden's picture

All that was presented in the earlier article. Now that we have the actual cumulative loss data (severity is irrelevant as losses will be ~100% essentially always), the true picture of the student bubble is complete.

fonzannoon's picture

At what point during this bubble popping process do the banks put the gun to their heads and scream "I'm gonna do it!"?

The Shootist's picture

Don't tell that to my communist H.R. professor at state. He's convinced that big goverment is the only thing saving the masses from greedy millionaires. He's cushy, and will get violent if you tell him his occupation is worthless.

A Nanny Moose's picture

It's been a while since I've walked the overpriced halls of the degree factories, but....H.R.?

ebworthen's picture

I would guess Human Resources, you know, giving people as little money and benefits as possible while increasing corporate profits.

Sabibaby's picture

Remeber Henry Paulson and his "Martial Law!" "Tanks on America's streets" comments to CONgress?

fonzannoon's picture

i read that. that guy got shredded in the comments section by a bunch of dipshits

matrix2012's picture

The article "JPMorgan Loss Could Be Next 'Shock' Event" is indeed interesting to read, but it seems that the author, ChartProphet, stang many sh!tholes there by exposing the JPM deep holes that he got so many negative remarks there :-)>

Just see his opening salvo! LoL

"The JP Morgan (JPM) trading blunder could result in a $100 billion loss, a contagion of its massive portfolio, and even the wipeout of its entire asset base. Even worse, these extremely risky and potentially-illegal actions on behalf of the CIO office and the "London Whale" could be the unexpected "shock" that breaks the market, derails the Fed's huge monetary stimulus, and sends us back into a global recession."

What a man ChartProphet is :D


kaiserhoff's picture

 (severity is irrelevant as losses will be ~100% essentially always), the true picture of the student bubble is complete.


What part of that is English???????????????????

Dr. Engali's picture

What part of what is English and why so many question marks when one will do? Don't bust somebody's chops about grammar when yours insn't so good yourself.

kaiserhoff's picture

I was searching for meaning among the agit-prop.

Do you have a clue what she is saying?

Betting the Dark Side's picture

Take a credit class before you open your trap on a credit topic, mo ron.


kaiserhoff's picture

Pardon me for breathing.  I didn't know this was dyke censorship night on ZH.

Good luck with that.


Dr. Engali's picture

You're not getting hammered because of your question. You're getting hammered because of your approach. If you had asked a legitimate question , looking for understanding, then you would have gotten help. Instead you attacked the statement , that's why you are getting hammered.

nbsharma's picture

Kaiserhoff: I say this rarely, but you are a moron. Look at the series of analysis that ZH has put together you idiot.

kaiserhoff's picture

OK, I see where she is coming from.  Clearly, all the money spent on ilene's education was wasted.

_ConanTheLibertarian_'s picture

Even I understood in one go and I'm slow at it...

Bam_Man's picture

"Better to remain silent and be thought a fool than to open one's mouth and remove all doubt."

LarryDavis's picture

Let's not forget the nexus between hedge funds (dart throwers with compliance officers and penchants for call girls) and endowments (not dick size). Not sure how much money endowments are in the scheme of things but I can tell you some of those Ivy schools have a ton of fucking money. Colleges (and even some elite high schools) are basically bag men for these fucking hedge funds and no one really talks about how dirty and ridiculous it is. Schools love to hide behind this veil of performic an important civic duty/not for profit (I went to some ostensibly good schools and didn't learn a fucking thing). Forgive my simpleton's reasoning, but if you aren't "for profit" then why are you gambling in financial markets? Can I start a charity teaching girls to deepthroat, raise some money, enter blackjack tourneys then pay myself (and the faculty) with those winnings? If I come up short can I enlist 18 year olds with no credit to take out 100-200k to pay me for some instruction? Is it a wise idea to give 18 year olds (whom society does not even trust enough to purchase alcohol legally-don't get me started on how fucking stupid our country's drug and alcohol polcies are)30-40k a clip when they haven't even received a modicum of basic personal finance skills? 

dwdollar's picture

I don't think this bubble is close to popping. ALL loans could be in default and it just wouldn't matter. Uncle Scam will keep giving money out until he can't anymore. This is now an example of another parasitic bubble (along with healthcare, SS, SNAP, etc.) which will grow and grow until the USD supporting it pops. The reality is this $20 billion a month has become mostly a stimulus to keep the "education" sector alive. It has little or nothing to do with real education. A backdoor QEx...

centerline's picture

I've been watching this student loan bubble space in horror for years.  Thank you for the hard work Tyler(s).

nmewn's picture

"The reason they are non-dischargable in BK is there is no underlying asset as in a real estate loan, just a pound of flesh."

Au contraire mon a mie...laws and contracts are made to be broken. Unfortunately, for the young naive students led down this primrose path, they contracted with those who actually make the

How "inspiring" do you think its gonna be for the "aspiring" medical student (just graduated) to discharge "his debt to society" in service to the state while his former vision of suppoting "ÖbamaCare" is dashed on the rocks of O'Barry's unstated dreary reality?

See Castro...I'm sure it'll be much different this time ;-)

A Nanny Moose's picture

A pound of brain. Assets only zombies could love.

Miss Expectations's picture

See this about Ben Bernanke's son:

Who ever imagined that Ben Bernanke would become a poster child for the student loan debt problem in America?  Recently Bernanke told Congress that his son will graduate from medical school with about $400,000 of student loan debt.

Redhotfill's picture

Or as some would say about a year's salary for most US doctors.  Hardly a stretch to repay.  If he goes into private practice he will make about $400-500 hr.  Unlike most countries you need a Dr.'s PERMISSION Slip called a prescription to buy antibiotics in the US.  Usually requires an "office" visit for about $125 that lasts 10 min or less.  Dr.'s have as good a lobby as Golden Sacks does.

BidnessMan's picture

Yep - why I go to Ecuador for any medical care I need. First rate doctors and facilities in Quito. Buy any drug you want except narcotics at any drug store at half US prices. If I want to buy generic Viagra, why should I need a permission slip from a doc? Last time I was there got two neck x-rays for an old football injury. $70 cash total. Visit with Orthopedic surgeon - $55 cash. He recommended an MRI. Got done same day for $180 cash. Would have been another zero at least in the US. And nothing goes into any US medical database. Short the US health care ponzi and big pharma - set for a huge fall.

disabledvet's picture

hence "perfect environment for bubble creation." and yes...fer sure the Tylers Durden are correct in pointing out "we have another debt bomb going off." but Universities can go bankrupt...just as hospitals can...and are doing. "the great unwind" proceeds apace. with no return to sound money bankruptcies will be considered normative going forward...although i did take note the motivation for the college vote has dropped off precipitously in this election as well. simply put incomes are stagnant...benefits for all intents and purposes are non-existent. there is no more economizing to be done. prices must FALL.

centerline's picture

I have been amazed it got this far.  Goes to show how desperate people are to hang onto the "norms" of decades past.  When that changes, it will happen fast though.

swissaustrian's picture

 "We believe the effect of the troubles in the student loan sector on the broader credit market will be limited and we do not expect significant spillovers from the student loan market to the rest of the economy or to the financial system,"

Ben Bernanke, circa March 2014.