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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Mr. Hudson's picture

People are paying 6.8% interest on their student loans, while the Federal Reserve gives loans to its parasite banks at almost zero interest. The students who are strapped with debt are the future professionals of America, and our government will not work with them to lessen their burden. They have their degrees, but many cannot find gainful employment. Maybe the government is planning to make an offer to the debt ridden graduates when WW3 begins: "If you join the military, we will reduce the interest you pay on your student loans."



imbrbing's picture

When I refinanced my house back in 2003 I paid off all my student loans with my "equity" in my house. Now I am in forclosure on my house.

Student loan problem fixed


Drachma's picture

Optimus Sub-Prime

hedgehog9999's picture

Solution for student loan problem:

-Get a job

-Develop good credit

- Borrow as much as you can to pay off said loan

- Go into bankruptcy

- start a new life again.

Fuck the banks!!!

helping_friendly_book's picture

I had the exact same thought. When I realized they would be garnishing my Social Security I fucking freaked andstarted to analyze my sudent loan debt. I have a good job and am building up good credit. I considered borrowing the 62k, paying the loan then defaulting on the loan. It only takes seven years to recover from bankruptcy.

boiltherich's picture

I was a student post military, I was one of the last to get the old GI Bill, but it did not begin to cover the expenses. Tuition at a state school yes, but anyone put a kid through school? That tuition cost is the tip of the iceberg.

What I did was work 10-16 hours a week, got a BEOG (Pell) grant, a California Board of Regents grant, and a small $2,200 student loan for the year. Added to the GI Bill I was able to scrape by in obvious poverty but I was a student, 85% of us were in the same situation.

Well, the GI/veteran students financial aid was handled not in the financial aid office but by the campus Veterans Service Officer and that guy decided to take a two week skiing trip. His duties were covered by some bitch from the financial aid office that did not like veterans. She took it upon herself to recalculate the Pell Grant applications for the vets based upon their total income where the instructions for application on the back of the form said in bold caps DO NOT INCLUDE VETERANS DISABILITY IN INCOME CALCULATIONS which because I can follow instructions I had not done, but this stinking cow added in my VA disability which at the time was only 300 or so a month, which put me over the limit for Pell Grant, when I went to the office to pick up that months check I was told to go into the office. There they told me that not only was I not getting any more Pell Grant money I had been overpaid for the last four months because I never qualified in the first place, would I kindly write them a check on the spot for the over payment.

Thankfully the Vet Rep was back the next Monday and said that he would take care of it, that the bitch that did this had done it to all the vets and several were disqualified from the aid. He wrote me a check for the monthly stipend from the colleges own account to be automatically repaid when the "mistake" was corrected. But it was a long weekend of worry I will tell you, at the start of the semester when my old Volvo crapped out I bought a little, new, '88 Dodge pickup with a payment of about $196 and I could not make the payment without that aid. Plus, my roommate could not afford to carry me on the rent, one of the worst weekends I ever spent.

Come Tuesday that week the veteran service rep said that Pell was a federal program and once they disqualify you the payments cannot be turned back on, he was really sorry but the bitch in the financial aid office had really screwed me and several other GI's. Oh yeah, and that check he wrote me out of college funds, he needed that back today.

Now I was was really fucked. I had no choice but to go to my employer and ask for more hours which was no problem for them, but in order to go to 20-25 hours per week at work I had to drop two of my four classes, which in turn meant that I had been overpaid on the GI Bill for both tuition and stipend for living allowances, they were based on full time attendance. Losing those meant I had to work 40 hours per week to just get by and that meant just dropping out till the fall semester began in September, and every cent I got in student aid for the semester was an overpayment. This was all going on in February.

Well, come autumn I went to sign up for classes and fill out the student aid forms and such but I was turned down. It turns out that while all this was going on the same bitch in the financial aid office counted my dropping classes from the day she cut my Pell eligibility which in turn put my student loan into default just a week before the new fall semester started. Once you have a defaulted student loan you do not qualify for any grants or GI Bill aid. You can't even apply till the old loan is paid off with interest. Needless to say I did not have the $2,400 they demanded for this. That was before the US Department of Education was the parent organization handling all of this and it was a hodge podge of offices and banks that administered these loans. I appealed and I appealed and no help.

I finally asked for an increase in my VA rating and it took a couple years but I won, and that made me eligible for Chapter 31 benefits for disabled vets which was really poor but enough to get through school. I went to Ohio and got a finance degree, had no car, slept on the floor of a one room apartment, and ate from the food bank for four years, though I still worked 30-40 hours a week as a temp. And all those years, and for another 4 years after graduation I had that defaulted student loan in the background haunting me. When I finally landed a good job and made some income they took my tax refunds. And by now with interest they wanted $4,500. When I went to buy my first house on my VA home loan benefit I was told I could not get the certificate, not till I clear the student loan.

It took a while but I finally found a USD of Ed office in Greenville TX that handled student loan issues. I told them the whole story and they agreed that I had been screwed, so they offered me a deal, if I would just repay the original principal they would call it even. Of course by then thy had already gotten over 1,200 in penalties and interest, but I paid the $2,200 and bought my house.

And the moral of the story is; if you need a student loan to go to college then, sorry to say, you should simply not be thinking about going to college. You can default through no intention of your own by technicalities you have no control over, and then your life just is not yours anymore. Do not do it. It is one thing when you think you can deal with banksters and the debt created can be discharged in bankruptcy under extreme and unfair situations, but what you have to know before taking a student loan is when you sign that paper you are handing your life over to the IRS and there is NO reprieve, no appeals, ever, if something goes wrong. It is worse than slavery because slaves could at least try to run away (till Dread Scott anyway) but in the modern electronic age you cannot run or hide from the IRS.

And if you think that brand spanking new degree is going to guarantee you the kind of career that will make repayment a walk in the park forget it. I graduated in fall of 1996 at the peak of full employment and in the most prosperous era this nation ever had and it was not easy finding a job or competing for a 30k a year position. You are going to find out that a lot of the other students you went to school with were in fact well connected and they are going to get the good jobs, after them the pecking order for the remaining jobs goes like this; handsome tall guys, females with big racks, better looking people, submissives, people who provide the employer with extra tax advantages or hiring them, like welfare to work hires, and finally you. Merit and intelligence is at the absolute bottom of the pile, especially in industries where "creativity" was not the central function of the job.

If you need a student loan to go to college you will be better off picking richer parents,  don't do it if you ever want to be free again.

snblitz's picture

I paid off my loans all at once after I graduated.  I was lucky and had a good paying part-time job during school.

However, 27 years later, the holder of the loans says I did not pay off my loans.

Can you imagine that I am supposed to provide copies of cancelled checks from 27 years ago?

The penalties and interest are now astronomical and my degree is gone because the school won't confirm your degree if you have an loan in default.

After paying off my loans, I did not hear a peep until 2008.

Bruce's picture

Don't forget about subprime auto sales. :)

The surge in auto sales is being completely driven by doling out more loans for a longer time
frame to deadbeat borrowers. Subprime auto loans now make up 45% of all car loans and the vast
majority of all used car loans.

Two thirds of all car sales are for used cars, so the fact that 37% of all new cars are being sold
to subprime borrowers is exacerbated by the ridiculous lending practices for used cars. The fine
folks at Zero Hedge have provided the outrageous data and a chart that proves beyond a shadow of
a doubt what awaits the American taxpayer – another bailout. Zero Hedge has already revealed the
GM fake recovery by detailing their channel stuffing over the last two years. Now they’ve dug up
more dirt on why car sales are surging. What could possibly go wrong providing loans for more than
the value of the asset to people with a history of not paying their debts?

•    Subprime borrowers received 56.46% of loans on used cars in the quarter, up from 52.70% a year earlier.
•    The average loan-to-value on new cars was 109.55%
•    The average used car loan-to-value ratio rose to 126.62%
•    77% of Subprime Auto Loans are for a period greater than five years

It’s amazing how many cars you can sell when you aren’t worried about getting paid. This is the
beauty of a fiat currency, a printing press, and a taxpayer available to pick up the tab after
the drunken party gets out of hand. The chart below provides the details of our superhighway to
disaster. The percentage of used car loans to prime borrowers is now at an all-time low, while
the percentage of loans to subprime borrowers is near all-time highs reached just prior to the
2008 crash. When lenders cared about being paid back in the early 2000?s, they rarely made loans
longer than five years. Today, more than 77% of all subprime used car loans are longer than five
years and average FICO scores are now well below 600. Just to clarify – if your FICO score is
below 600 – YOU ARE A DEADBEAT.

trillionaire's picture

Did similar student debt build up in Japan or is this unique to the US? 

ZackAttack's picture

Education? That's one bubble down. 

Medicine and defense on deck. 

LucasATX's picture

What's the problem? GS is going to "buy" up all the student loan debt, repackage it and sell it to the Fed. I am sure that The Fed will soon introduce its Education Backed Securities (EBS) purchases as part of QE8.

GS makes a profit, the bubble disappears and The Fed can say it is part of their job creation program.

Don't you understand how this all works yet? 

alamoillini's picture

Unlike the mortgage subprime bubble, I think these loans are recoverable.  The housing "bubble" was leverage increasing the valuations of real estate "artificially." because of the fractional banking system,

these student loans can be paid back by changing the unemployment trends.  and that is can begin the process of recovery with the correct policies being implemented..

I live in Texas, my children are in college and are using student loans as part of their plan for completing their education.

I have no doubt they will pay off these loans within a period of 10 years of graduation...why? because they are employable and are becoming educated in skills that they will use in working at jobs that are being produced by the Texas economy.

Too bad, most of the country does not follow the Texas model.....Texas is self sufficient and a net energy exporter....if only California had the same state government that Texas had, then USA can be turned around....follow the model of successful States who encourage and do not penalize free enterprise, keep taxes and government intervention to a minimum.


syntaxterror's picture

From the Wall Street Journal today:

The Obama administration has sought to ease the burden of student debt by expanding a program that limits debt payments by income and time.

The new rules, authorized by Congress and set to be finalized next month, will cap payments on federal student loans at 10% of a borrower's "discretionary" income—essentially the money remaining after taxes and living expenses—and then forgive any remaining debt after 20 years.


There you have it. The Sixteen Trillion Dollar Man already has the bailout plan in place.

We'll fondly look back one day and remember back when the debt was "only" 16 trillion.

foxmuldar's picture

Its all playing the way Obama wants it. Give him four more years and America will be Obama's own banana republic. 

minus dog's picture

This default rate doesn't factor in countless billions in loans that people aren't making payments on.

Remember, borrowers have the option to have their payment amount pegged to a fraction of their income [past 150% of the poverty line]... I believe the fraction is 10% now.   After 10-25 years (depending on whether you're a civil servant or just a regular peon), the Dept. of Ed will actually write off the remaining balance of your loan entirely.


You can go borrow 250K to get an advanced degree, get a job flipping burgers, pay back 25k, over 25 years, then be off the hook.  No job?  No payments.

.... And that 225K plus interest is not being accounted for.    They're simply pretending it will be paid back.

AmeliaV's picture

Lol@ time to move to Africa! You made my day!!

Looks like the situation with student loans is only getting much worse and worse.Debt is constanly rising. For example let's take housing market. It shows some slow but still signs of recovery. Unlike students loan debts is shwoing only how desperate and misarable borrowers situation is. Goeverment keeps on financing program like the solar energy one while an average graduate has $25000-$35000 that he/she will most likely carry to the grave( of course I wish they will repay it ASAP). Here is how situation lookslike to me: a lot of young people are starting to question the system of high education we have at this moment. WHat can I say, they are absolutely right.

Amelia from:  pay day loans online company