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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Northeaster's picture

I don't recall what the regulation was, but the "for-profits" made a huge push in CONgress through lobbying efforts to not become regulated in this regard.

Money talked...this is what we get, a generation of kids with questionable educations, massive debt, and no jobs and these "institutions" laughing all the way to the bank, literally. 

I don't know anyone professionally with a degree from The University of Phoenix.

Alternatively, go to a state school where Spanish teachers (Hernandez) retire with $100k-plus pensions:

Mr.Bigfoot's picture

I have a brother in law who has flunked out of college twice, continued with the student loans in community college and now he's back at the same state school as a fifth year sophomore. This is certainly money well spent. I know for a fact he's much better at packing bongs and has set records on his X box video games over the last 5 years.

AUD's picture

he's much better at packing bongs and has set records on his X box video games over the last 5 years

Isn't that what university is for? For me it was more packing bongs & surfing, waves, not internet but we were just lucky I guess.

Those were the days. Quality education collateralising quality debt!

Urban Redneck's picture

I majored in beer and pussy, but the school wouldn't put on their worthless piece of paper, so they put International Business.  The paper (and the whole college experience) was absolutely worthless in terms of preparation for what one actually encounters when doing business internationally.

But now apparently you can get same piece of paper w/o demonstrating even basic proficiency in comprehension, reason or problem solving, much less the navigation of misleading balance sheets, avoiding corrupt politicians, and the lethality of crossing the path of big money.

I feel sorry for these fools who sold their souls and indentured their bodies for a piece of paper not even worth 30 pieces of silver, but at the same time, there is basically no job that I would hire them for- they lack the actual skills for a skilled postion, and they tend to have an attitude and work ethic unsuited for unskilled positions.   

ebworthen's picture

When the bankers are sucking big bonuses after being bailed out, and politicians getting money under the table and Cadillac health plans and pensions - seems like your brother in law has learned something - and can you blame him?

mayavision2012's picture

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

Please pardon my naievty here, but are our taxes actually subsidizing FOR-PROFIT PRIVATE schools?  And from that statement above, it would appear that the most defaulting of student loans is coming from wealthier kids?


jerry_theking_lawler's picture

I may be wrong but these would be DeVry, Virginia College, etc.......

razorthin's picture

"Never a borrower nor a lender be"

What a fukking pearl of wisdom.  On the surface it looks like a chicken-egg conundrum.  But look closer.  Did the first borrower say, "Gee Mr. banker man, I really really want this very expensive item which is multiples of my annual salary.  How about you invent a scheme where you take peoples' deposits and loan out 90% if that deposit as "new money" you can 'give' me, for which I'll gladly pay you interest."

Thought not.

Poor Grogman's picture

Not only that but it also advises against putting money in the bank, think about it...

razorthin's picture

With the Fed, deposits are not needed.  It's magic.

The big unzip's picture

Just had some type of explosion at a refinry in oklahoma.  Ness crews are in route to the scene

Adahy's picture

Doesn't sound like the safest place.

From newsOK:"

Between 2006 and 2010, five fires erupted at the refinery.

In May 2006, the refinery's explosions and fires forced about 150 residents to evacuate. About a week later, a fire-related acid leak spurred more evacuations.

In April 2007, the refinery was struck by lightning, causing a fire that burned for several days.

In February 2008, a furnace caught fire. In December 2010, a gas release in one of the refinery's processing units caused an explosion."

BigInJapan's picture

They'll be able to work off those loans in the wars.

fonzannoon's picture

bingo biginjapan. You missed a payment? Oh, thats is a solution....

mtomato2's picture

To me, the biggest problem this is going to create isn't the money bubble, but the graduate bubble.

Who is going to hire these poor schmucks?  The demand for goods and services isn't going to return to the "good ole days..."  at least, not soon enough to employ the next several generations of graduates.  So they all go on unemployment, goosing the deficit even higher (!) and in the meantime producing nothing and defauting on a gargantuan debt.  Each one a debt bigger than my entire mortgage. 

So instead of sitting on an 8-month (low end) supply of houses, as we are now (in the wake of the housing bubble,) we are going to be sitting on a 6-10 YEAR supply of laborforce-ready delinquents.  Who need food, shelter, clothing,...



...titty bar folding cash...

Sabibaby's picture

So you're saying I should take out a student loan before they stop being provided?

I feel so stupid for missing the housing bubble and living rent free for a year or so. I really don't want to miss out on the next thing...

Earl of Chiswick's picture

one of the many tragedies of the housing subprime was the resulting unemployment of the hardworking trades of the housing industry


One of the many benefits of the education subprime will hopefully be  the putting out to barren pasture of the tenured asshole elites who suck off the naive students who subscribe to the higher education lie

nah's picture

we could send them to FEMA camp next summer

q99x2's picture

Now wait a minute before you go claiming the kids with the highest sex drive can't party.

The real estate bubble was created by the FED banksters so the US could buy Chinese junk and thereby make the banks TBTF and the Corporations financially larger than national economies and the politicians happily bribed. The FED went on to create the student bubble to ease the impact from the fallout of the housing bubble to give them enough time to build up the DHS (SS) military TSA and 3,500 surveillance corporations in preparation for the next time the banksters from the TBTF go into the President's office to tell him he has to impliment Marshall Law and where to sign on the dotted line to thereby take over the United States for the Queen of the No World Order. The US military can't even take over a couple of hopped up pull tops how the hell do they think they can take over the US when half of the military are prepared to go after Banksters in the first place.

I think they better find another way to get the Obamaphones out--quick.

The Federal Government would do a lot better to Arrest the FED for treason, kick the bankster out or put them into prisons and revoke the globalists citizenships. America doesn't need anything from them anymore. We can rebuild a beautiful country without the parasitic M'Fers.

sangell's picture

If Obama had a son he would be that strutting hubshi twisting and flexing his huge rubbery lips as he applied for a new student loan at the INNER CITY SCHOOL OF ADVANCED APE STUDIES.

tmosley's picture

I wonder if they count the $0 payments from loans consolodated into income-based loans as defaults?

Probably not.  Lots of people going on disability--probably all of them qualify for that program.

Cman5000's picture

 Man and Woman Sells their soul to the devil. All ends in tears, these arrangements usually do...

Zadok's picture

Isaiah 10:13,14

Who is doing the talking?

Who is he talking about?

max2205's picture

Pretty sure they will change these discharge rules

"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."

Zadok's picture

Looks to me like the debt serf system is functioning spectacularly! I am not holding my breath for the masters to ease up on the pressure.

Catullus's picture

They won't discharge anything.  When the student loan market becomes owned by the Treasury, the government will NEVER forgive the debt.  It's going to amount to a tax surcharge on these people.  Just an entire generation of people lugging around an extra monthly payment to the government.

Ineverslice's picture

Aaah...fema camps...

Complete with wireless Obamanet. I get it now.

Carry on.      Edit:  +1 nah, lol

The Shootist's picture

It's alright, it's for the children. You see, the young sheeple must be sent to the socialist fiefdoms for their state indoctrination. Go to school, become indebted, learn pointless classes, mindlessly vote democrat.

Rattling Bones's picture

The government backs the crazy money schools charge, the schools use that money to give the teachers crazy pay and benefits to keep the teachers teaching the students that this debt we are saddling them with isn't crazy.

yellowsub's picture

For a moment, I thought you were referring to the teacher's union. 

Public education costs are out of control like any gov't union.

booboo's picture

Don't cry for these young debt monkeys, the government will have an offer they won't be able to refuse. Working as stasi informants won't be such a bad gig once they get used to the stench of pig shit.

Cabreado's picture

"...there is no recoverable asset as the asset is a human being."

And about those human beings...

I think it would be very difficult to come up with a more perfect example of how this society is cannibalising itself.

tony bonn's picture

there really is nothing to worry about....ben has our backs....besides,who would want a student load anyway? you can't eat it, you can't fire bullets with it, and it doesn't earn interest.....

SheepleLOVEcheddarbaybiscuits's picture

all these obama ads saying how their "solution" is lowering college tuition and providing a future for bright minds makes me FUCKING SICK to my stomach! The worst decision I have made this point in my life was going to college on student loans....lesson learned.

I had to call sallie may yesterday about one of my loans:

1. the loan rep could barely speak english and had no clue as to what she was doing

2. the bitch had to nerve to try and convince me how sallie mae is ready to finance my post grad education with a loan

I fucking hung up on her

Arnold Ziffel's picture

Why pay back your loan (or doctor bill, or mortgage, or credit card, etc) when you can grab another iPhone?

Don't be an old Fuddy Duddy, grab the iPhone and forget the debt. Let Unlce Sam foot the bill.

This is 2012 -- the Year of the Ponzi.


(and you thought it was the Year of the Dragon...he he he)

americanspirit's picture

What nobody ( at least those in 'official' positions) appear to understand is that students who take out loans don't feel any obligation to repay them. Why should they - they know that the whole thing is a con.  In fact, 'fuck you' is the general opinion toward these 'obligations'. Those making the loans, and those seeking to profit from them, are from another generation and are operating on past-tense assumptions. Today's 'students' understand that they probably have zero future income earning power, and the loans they take out to go to school are simply a way to spend a few pleasant years before they join the ranks of those living in desparation in cardboard boxes under the interstate overpasses with their college diplomas displayed on the crumbling walls of their lives. Anyone who thinks that young people today are conned into believing that a college education means anything at all for their future is an idiot, and they deserve to have their 'investments' turn to ashes. (Yes Mitt, I'm talking to you and your skumbag wife, among others.)

SheepleLOVEcheddarbaybiscuits's picture

youre an imbecile......I pay my loans asshole. IF you DONT have a college education or some technical skill then you are proper fucked......a college education you are just fucked, a post grad degree a little less fucked, a doctorate youre ok

ebworthen's picture

lol...that's a maybe...and only in a cohesive society, not a collapsing ponzi.

BidnessMan's picture

Well it depends. If your degree is in Cosmetology, philosophy, sociology, women's studies, and similar BS majors, you are screwed. But you did it to yourself. In today's economy you are worthless. Shows you are stupid, and you can't fix stupid. Any resumes I get with these types of degrees go directly in the trash. If you borrowed a bunch of money for a useless degree, you are double stupid.

Why would I hire a double stupid person?

RSBriggs's picture

-1 obvious liberal troll.  How much they pay you per hour to stink up the place?

ebworthen's picture

Politics and the false dichotomy of "liberal" and "conservative" keeps the ponzi going, capiche?

ebworthen's picture

You have a point.

After bailing out Wall Street, GM, AIG, Banks, etc. - it is hard to argue that students or anyone else should pay back their loans.

Oldwood's picture

Some people,when given a tool will build a house while others may play with it or toss it aside. lets just hope they don't smash us over the head with it the way Obama has.

lolmao500's picture

What about you give them 0.25% INTEREST on those loans just like the scumbags too big to fail banks?

zerotohero's picture

We are all part of an elaborate plan created many centuries ago - it has become so ingained in us to attend "higher" education an be a part of the "plan" in order to control us and contribute to the "plan". They want you in the "plan" so that you contribute to their (TPTB) ability to both control us and increase their power and wealth. Break the chain - dismantle the system - do not attend their institutions of control - be free - be you - be what ever you want to be and then you will have TPTB completely powerless.

Peter Pan's picture

The sub prime education loans are nothing compared to the sub prime expenditure on waging wars of no benefit to the American people.

Either a war is fully funded without requiring deficit spending or else those that vote for it or benefit from it should fund it.

The government has let this edcation bubble thrive and survive so as to keep the unemployment numbers down as well as to lump the cost of people who would otherwise be unemployed on to them and their parents.

justsayin2u's picture

Nothing a couple of monthe of QE cant handle.  Bernankistien loves garbage.  Bring it on boys.

sansnobel's picture

Isn't that what the Central bank of the USSA is for?  I thought they finally changed the definition of the Federal reserve to read "The place where all bad debts go to die"

ebworthen's picture

Kind of funny, if you think about it.

When do the hangings of the kleptocrats and oligarchs start?