Here Comes The Student Loan Bailout

Tyler Durden's picture




 

2012 is the year the student loan bubble finally popped. While on one hand the relentlessly rising total Federal student debt crossed $956 billion as of September 30, and was growing at a pace that will have put it over $1 trillion by the end of 2012, the one data point confirming the size, severity and ultimately bursting of this latest debt bubble was the disclosure in late November by the Fed that the percentage of 90+ day delinquent loans soared from under 9% to 11% in one quarter.

Which is why we were not surprised to learn that the Federal government has now delivered yet another bailout program: this time focusing not on banks, or homeowners who bought McMansions and decided to not pay their mortgage, but on those millions of Americans, aged 18 to 80, that are drowning in student debt - debt, incidentally, which has been used to pay for drugs, motorcycles, games, tattoos, not to mention countless iProducts. Which also means that since there is no free lunch, all that will happen is that even more Federal Debt will be tacked on to replace discharged student debt loans, up to the total $1 trillion which will promptly soar far higher as more Americans take advantage of this latest government handout. But when the US will already have $22 trillion in debt this time in four years, who really is counting? After all, "it is only fair" that the taxpayer funded "free for all" bonanza must go on.

The latest debt bailout, not surprisingly is not titled "Yet another taxpayer funded bailout for those who bought things they can't afford on credit" as that would not be very politically prudent, especially for those politicians who still have taxpaying citizens as their voters. Instead, its name is the much more PC: "Pay as You Earn Repayment Plan." Alas, it really should be called the former, because what it does is it incentivizes Americans to borrow even more Federal student loans, well aware that there will now always be a cap on the associated monthly interest payment which will never leave a mark regardless what the full underlying loan notional is. It also provides for full debt discharge should the borrowers end up with cushy Federal jobs - because the one thing the US government needs afford is more debt-saddled government workers.

What is the "Pay as You Earn Repayment Plan"? The WSJ explains:

A new federal program should make it easier for some recent college graduates to keep their student-loan payments manageable.

The new option, known as the "Pay as You Earn Repayment Plan," lets eligible borrowers sharply lower their monthly loan payments and qualify for loan forgiveness quicker than they might otherwise.

"It's a very good safety net for students who borrow too much," says Mark Kantrowitz, publisher of the financial-aid site FinAid.org. "If your debt exceeds your annual income, you will probably benefit."

 

Pay as You Earn, which took effect on Dec. 21, "is designed to help offset the effects of the recession for student borrowers most likely to take a hit in this tough job market," says Lauren Asher, president of the Institute for College Access and Success, which has pushed for the creation of income-based repayment plans.

Which in the New Normal, means everyone with a student loan will benefit. It also means, that courtesy of knowing this safety net is there, more and more people will take advantage of the government's latest generosity with other taxpayer's money.

What are the terms of this new bailout?

The new program comes at a time when rising student-loan balances—amid a still shaky job market—have weighed heavily on many families.

 

Typically, federal student loans must be repaid within 10 years. At current interest rates, that can work out to a monthly payment of roughly $300 for a borrower with $26,000 in debt.

 

Pay as You Earn, by contrast, limits student-loan payments to 10% of "discretionary income" as defined by government formulas. Borrowers who make regular payments could have the remaining unpaid amounts forgiven after 20 years.

So much for student debt being non-dischargeable: borrow hundreds of thousands, but make your monthly payment of a hundred or so bucks, and in 20 years you will be debt free, courtesy of US taxpayers. Actually, scratch that: one doesn't even have to make a payment!

In some cases, borrowers with low incomes could be required to make a zero-dollar payment and would still be considered current on their loan. Monthly payments can increase or decrease each year based on the borrower's income and family size.

For those who think getting full debt forgiveness in 20 years is far too long, why there's a loophole for that too: just go "work" for Uncle Sam:

Borrowers with public-service jobs may qualify for loan forgiveness after just 10 years.

As for eligibility "constraints":

To be eligible for the program, borrowers must have taken out their first federal student loan after Sept. 30, 2007, and received at least one federal student loan after Sept. 30, 2011. Borrowers also must meet eligibility cutoffs based on the size of their debt, their discretionary income and family size.

 

The U.S. Department of Education's Pay As You Earn calculator, available at studentaid.gov, can help you determine if you qualify. Borrowers can apply for the program online or by contacting the loan servicer that collects their payments on behalf of the federal government.

In other words, virtually all people who were responsible for the diagonal take off in the Federal student loan total in the current depression are now eligible for what will eventually be full debt discharge.

So let's get this straight:

  1. go to some "everyone who applies is admitted" community college
  2. take on the biggest Federal loan one can get
  3. use the proceeds for everything besides the tuition (of course)
  4. be unable to find a job after graduation (naturally)
  5. plead poverty, accusing evil employers who don't hire those who majored in Foosball, and make "zero" payments while remaining in "compliance"
  6. get a job working for the government, wait ten years, and have the entire loan magically disappear.

And there it is: incentives for the common, and very much broke, man in the New Normal.

If there is anyone out there who thinks this will not result in a "charge it" feeding frenzy and that the Federal student loan total will not go absolutely parabolic going forward, please raise your hand.

Of course, what is not discussed, is who is on the other side of all those forgiven loans. And the answer, dear taxpaying US readers, is starting at you in the mirror. Because all the Federal government will do is transfer the unfunded obligation, which has already been used to satisfy the purchase of goods and services, from one individual to the whole group.

But when one is dealing with the government of a country that is no longer even fit to be defined as "banana", what is adding one more trillion between already insolvent counterparties.

Finally, yes, this means the Fed just tacked on one more year of QE to its $1 trillion/year in US debt monetization, which also means the Fed's balance sheet will now also be used for to fund student loan forgiveness, among so many other things.

Insolvent students of the world, unite!

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Sun, 01/06/2013 - 13:31 | 3127152 TrulyBelieving
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double post

Sat, 01/05/2013 - 16:32 | 3125611 JPM Hater001
JPM Hater001's picture

I like how the bailout helped people who borrowed too much as opposed to those who lent.

The whole thing still fucking stinks.

Sat, 01/05/2013 - 16:37 | 3125627 WestVillageIdiot
WestVillageIdiot's picture

And the guy that doesn't borrow gets a good, hard one in the ass, once again.

 

This is no different than all of the "homeowners" that took out 100% mortgages, or more, and now live free in "their homes".  The irresponsible prosper as the responsible get ass-raped.  But the whole point is to use government programs as slush funds to buy votes from preferred constituents. 

And on and on it goes.  Which part of his voting base will FauxBama bail out next?  If I were a golfer I would be wracking up as much debt as humanly possible.

Sat, 01/05/2013 - 17:19 | 3125752 fonzannoon
fonzannoon's picture

This should be a huge boon for the 529 plan business. By boon I mean THE END.

Sat, 01/05/2013 - 18:24 | 3125888 lewy14
lewy14's picture

Also: a brand new class of employment for new graduates... a kind of extended internship which (a) pays almost nothing for some time (so qualifying the new employee for the "financial hardship" status which will cap his loan payment) and (b) provide the experience and credentialling which will provide a pathway into the elite.

In short, this bill will kill entry level salaries for all jobs - "good" jobs as well as "bad" jobs - because there will be a huge new pool of graduates who will take the tiny salary, and view it as a "feature", not a "bug". There will still be huge competition for these "good" jobs - especially in STEM (Science, Technology, Engineering and Math) as they will hold the promise of big $$ and power later...

Sat, 01/05/2013 - 20:19 | 3126103 AldousHuxley
AldousHuxley's picture

In Japan, there are workers at Toyota who has been "temp" employee status for 10 years.

 

In Europe, you don't get jobs unless you know someone and it is only a job at government agency doing shuffling paper.

 

only humane thing would be to decrease population as nature tend to curb overpopulations by depriving resources.

Sat, 01/05/2013 - 23:48 | 3126433 strangeglove
strangeglove's picture

Can ya spare a match?

Sat, 01/05/2013 - 18:17 | 3125878 nmewn
nmewn's picture

"Borrowers with public-service jobs may qualify for loan forgiveness after just 10 years."

You see comrade! Your service to the Fatherland will be rewarded!

Fucking Forward!!!

Sat, 01/05/2013 - 19:24 | 3125997 cynicalskeptic
cynicalskeptic's picture

I'm wondering just how many government jobs will actually be available for these graduates.....  local gov is cutting back, laying off people.  The Feds may have been expanding their hiring but I wonder how much longer before we see serious cuts there.   If you can't GET a gov job the whole thing is moot.

Sat, 01/05/2013 - 19:44 | 3126027 nmewn
nmewn's picture

Well, the "progressives" in our society wanted (or fell for the idea of) giant FDR-type public works projects...

(Putting on my national socialist central planner hat & grinning like a possum eatin poop while clamping a cigarette holder in my teeth) a third can be put to work toiling away in the fields to feed the other two thirds of the government labor force, another third working on all those decrepit roads & bridges that never seem to get fixed no matter how much money is thrown at cronies and the final third (unsuited by nature or circumstance) in the administration of it all shuffling papers around tracking it all.

Its what they wanted...I say give it to them in spades ;-)

Sat, 01/05/2013 - 21:58 | 3126173 oldman
oldman's picture

@nmewn and all

What they want was to give more to the banksters and more to the MIC to take over more of the planet-----the banks didn't take enough and the military couldn't have asked for more, so they were forced to borrow for diplomas--------------   

"After all, "it is only fair" that the taxpayer funded "free for all" bonanza must go on."

It is all the fault of the underclass who are mainly unemployed, underemployed, or working for slave wages that the US is so screwed up, right?

You dudes mak me want to vomit with your 'fear and loathing'--------------get a life!     om  

 

Sat, 01/05/2013 - 22:05 | 3126286 nmewn
nmewn's picture

What they want is exactly what I described, you (and others) being subservient little worker drones.

"There is, in fact, only one solution: the state, the government, the laws must not in any way concern themselves with schooling or education. Public funds must not be used for such purposes. The rearing and instruction of youth must be left entirely to parents and to private associations and institutions." - Mises

So now what has really been accomplished with this "progressive" Prussian model of indoctrination of our children to the state? Are we and our children more free or less free, overall?

You should turn your attention back through time to the era of Wilson, Morgan, Rockefeller and discover for yourself what "our" education really is and what it is used for.

I will no longer work for free in order to show you or anyone. My charity level has become completely & utterly exhausted. You are now, on your own, adrift.

And good luck.

Sat, 01/05/2013 - 22:35 | 3126334 oldman
oldman's picture

@nmewn

Shirley, you are being sarcastic!

Who would ever ask a mises miser for anything?

I have no idea of why you think that anyone would ask you for anything---especially financial advice

Please do not respond to this---I will be in the bathroom all night vomiting

ZH has truly become Troll City but how can there be so many of you?     om

Sat, 01/05/2013 - 23:30 | 3126399 nmewn
nmewn's picture

"but how can there be so many of you?"

Haven't you heard? From each according to his ability, to each according to his needs and you need to puke.

My only expectation from you is that its in a toilet you purchased with your own labor and not a toilet I subsidized or is asked of my children to subsidize.

Are we clear?

Sat, 01/05/2013 - 23:49 | 3126429 oldman
oldman's picture

nmewn

You are still being sarcastic

"Are we clear?"

Have a cup of tea, nmewn?   Please do----relax---you are beginning to unravel---to sound like a Dick Cheney or one of those other fascist bullies who are the role models for most trolls

Please, have a cup of tea, nmewn                    om

Sun, 01/06/2013 - 01:51 | 3126605 nmewn
nmewn's picture

I see you've crawled out of your vomitorium.

Thats very good, you'll find decent tea is not vomit inducing ;-)

Sun, 01/06/2013 - 10:14 | 3126853 mjcOH1
mjcOH1's picture

"I'm wondering just how many government jobs will actually be available for these graduates.....  local gov is cutting back, laying off people.  The Feds may have been expanding their hiring but I wonder how much longer before we see serious cuts there.   If you can't GET a gov job the whole thing is moot."

This may require a second trillion dollar coin....

Sun, 01/06/2013 - 10:18 | 3126858 centerline
centerline's picture

Offer something to the debate.  Geeze.  You just made yourself out to be the troll here oldman.  Fail.

Sun, 01/06/2013 - 11:08 | 3126908 nmewn
nmewn's picture

I found hs "mises miser" remark, well, revealing.

Ludwig von Mises (like most others of the Austrian persuasion) looked dispassionately at both socalism & capitalism and came to the conclusion (properly so) that socialism will always fail.

For this, oldman calls him a miser?...lol...yeah, sure, whatevah.

"A man who chooses between drinking a glass of milk and a glass of a solution of potassium cyanide does not choose between two beverages; he chooses between life and death. A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings." - Mises

Anyone who thinks the socialist state can be properly fine tuned to be the sole provider of good works hasn't reached the point of their life where the state will make the "miserly" decision of cutting off their health care based on nothing but their future life expectancy.

What can I say...he just doesn't get it.

Sun, 01/06/2013 - 00:17 | 3126486 francis_sawyer
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 "What they want was to give more to the banksters and more to the MIC to take over more of the planet"

~~~

Last night I happened to watch FULL METAL JACKET on TV... The ending scene is where the plattoon is humping it thru the war torn land & all singing the "Mickey Mouse Club" song... "M-I-C... K-E-Y M-O-U-S-E"... It immediately dawned on me why Kubrick chose that song & that imagery...

Sun, 01/06/2013 - 08:48 | 3126789 S5936
S5936's picture

Can you say NDAA . They'll be assigned to the euthanize granny brigade.

Sat, 01/05/2013 - 21:06 | 3126200 Overfed
Overfed's picture

I took out a 0% down ARM eight years ago on my place, had a credit score of 620. I paid my mortgage faithfully for four years (shoulda waited another couple), and refi'd with a conventional loan. Now my credit is 800, and I can't get another loan for shit. Go figger.

Sat, 01/05/2013 - 21:22 | 3126222 Omen IV
Omen IV's picture

its not the credit score that is important its your  IQ - you need to fuck the banks and then you get more money - wake up!

Sat, 01/05/2013 - 23:24 | 3126390 Raymond Reason
Raymond Reason's picture

The irresponsible prosper as the responsible get ass-raped.

The country is run by parasites, who were raised by parasites from a long line of parasites, and don't possess the genetic ability to produce anything but more parasites, either through procreation, or enlistment.  Their business is stealing, and business is good. 

Sat, 01/05/2013 - 17:19 | 3125749 spinone
spinone's picture

It helps the bank who lent - they can't get blood from a stone anyway, so now this formalizes a tapayer funded bailout.

The FED is fighting deflation with both bazookas ablazing. The problem is that as an unintended consequence (?) failed organizations get put on life support, competinga nd draining resources from successful ones. This zombifies the economy (think GM vs Ford. If GM went under, then Ford wouldn't have to compete against them and could sell more Focii)

Sat, 01/05/2013 - 20:22 | 3126107 AldousHuxley
AldousHuxley's picture

it is all for the banks.

 

home owner bailouts = bailout for banks who made the loan

student loan bailouts = bailouts for banks who made the loan

government austerity/bailouts = bailouts for banks who made the loan

 

Instead of putting people in debt, then bailing them out, they should allow people to make purchases outright by increasing supply and lowering purchasing costs.

Sat, 01/05/2013 - 23:52 | 3126116 nmewn
nmewn's picture

"Instead of putting people in debt, then bailing them out, they should allow people to make purchases outright by increasing supply and lowering purchasing costs."

Who is "they"?

//////////////////

No answer? Why is that?

Couldn't possibly be the same "they" who pushed people toward debt as an outlet for their desires in the first place could it? And how will this new monstrosity of central planning play itself out?

We gonna have the state implement price controls?...wage freezes?...wage rises?...mandate production increases at the point of a gun to drive prices down, at who's expense and who's labor and final glut?

Babe, really?

The only way out is debt repudiation or systemic collapse...gird your loins and keep your head out of the toilet because reality doesn't change...only your perception of its echo.

Sat, 01/05/2013 - 20:34 | 3126128 boogerbently
boogerbently's picture

You're kidding, right?

This IS another bank bailout.

They don't care about students, just the institutions that are OWED this money.

Sat, 01/05/2013 - 17:47 | 3125827 Laddie
Laddie's picture

Bill Clinton tightened the screws on student loan discharge and Joe Biden finished the suckers off with his Bankruptcy bill in 2007, he fronted for the credit card scammers while a Senator.

But you make a valid point, the banksters on the Upper Eastside of Manhattan got TRILLIONS, perhaps SEVEN TRILLION taxpayer dollars. Most of these students were just going what SOCIETY said to do, and why should their LIVES be ruined, forever? A dear friend of mine's son did what everybody says you should do and got loans and went to college to study engineering. Upon graduation he found that the firms were hiring Indians and other Asians for those engineering jobs. His father had been IT who was kicked out after he trained his Indian replacement. So since all the "favorites" of the regime have been getting "goodies" from We, the Suckers, why shouldn't some of our own get it? For goodness' sake.

SCREW THE BANKSTERS and their PUPPET in the Black House.

Sat, 01/05/2013 - 18:42 | 3125914 CrockettAlmanac.com
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Most of these students were just going what SOCIETY said to do, and why should their LIVES be ruined, forever?

 

They should learn not to do the stupid things that government -- not society -- enables them to do. Someday they may end up doing what the government tells them to do and have their lives ruined in an exploded Humvee in some God forsaken place. There's no bailout for that.

Sat, 01/05/2013 - 20:25 | 3126112 AldousHuxley
AldousHuxley's picture

it was part of central planning by neo-liberal economists.

 

1 export "dirty" manufacturing jobs to Chinese slaves

2 import illegal mexicans for "dirty" service and farm jobs in states

3 US Citizens get entertainment/sports jobs or cushy jobs after college education with high US salary

 

except business got around this by importing college grads for entry level jobs.

Sat, 01/05/2013 - 20:32 | 3126123 nmewn
nmewn's picture

Sounds like we need a little LESS central planning.

Sat, 01/05/2013 - 19:40 | 3126025 HurricaneSeason
HurricaneSeason's picture

The professors are the big winners.  If nobody has to pay, they can charge more and more.  Either the graduate gets a crappy job or no job or a good job (public sector) and doesn't have to pay.

Sat, 01/05/2013 - 23:45 | 3126421 mercenaryomics
mercenaryomics's picture

Not the professors; while there are some professors now of bs courses and majors, many professors don't even get paid all that well. Schools don't value the quality of the education they produce anymore, so why bother paying good professors when your football team gets alumni dollars and new sheeple students with untapped federal loan coffers. 

The beneficiaries are these huge administrations, collegiate sports teams, and school bureaucracies, all of which have been exponentially expanding from funding by endless student loans. Increasing education's cost while watering down its value. 

Sun, 01/06/2013 - 02:14 | 3126623 HurricaneSeason
HurricaneSeason's picture

I imagine beer commercials and real estate investments are near the top of the priority list. Gotta have lots of marble and brass too.

Sat, 01/05/2013 - 18:02 | 3125852 fonzannoon
fonzannoon's picture

Tyler I humbly put this forth as the ZH National Anthem. Should suit us well going forward.

http://www.youtube.com/watch?v=n4dmkswFCq8

Sat, 01/05/2013 - 18:44 | 3125916 CrockettAlmanac.com
CrockettAlmanac.com's picture

Don't do that.

Sat, 01/05/2013 - 18:49 | 3125928 fonzannoon
fonzannoon's picture

I give up Crockett. Had a blowout argument with a friend of mine last night over all this shit. I just don't care anymore. People are already brainwashed. What a mess.

Sat, 01/05/2013 - 18:59 | 3125947 CrockettAlmanac.com
CrockettAlmanac.com's picture

A friend of mine has said some things lately that make me think he's starting to see the handwriting on the wall. It's encouraging but I fear time is short. On the other hand I'm tired of waiting for the other shoe to drop.

Sat, 01/05/2013 - 20:17 | 3126096 FoeHammer
FoeHammer's picture

It's not too late guys. Others will catch on. They need real teachers and mentors though. I'm sure there are more than a handul of folks here at ZH who have the wisdom and ability to pass the message through even the thickest of skulls.

 

Just a handful of years ago I was a state AND religion loving neocon...I've come a long way but only with the help of truly knowledgeable folks. Lots of credit goes to them!

Sat, 01/05/2013 - 21:19 | 3126220 CrockettAlmanac.com
CrockettAlmanac.com's picture

+1

In 2006 I was elected to a picayune seat on my local Democratic Committee which I resigned in 2008 so that I could register Republican and vote for Ron Paul in the PA primary. There are many paths to enlightenment, grasshopper.

Sun, 01/06/2013 - 12:31 | 3127040 Raymond Reason
Raymond Reason's picture

If you were a religion loving neocon, you were a protestant.  Good move, but don't throw out Christianity with Protestantism.  Most ZH people are smart guys, no doubt.  But IQ and wisdom are entirely different things. 

Sun, 01/06/2013 - 04:51 | 3126702 Frozen
Frozen's picture

It's over.

Doug Stanhope on population:

"Don't bring the product out before you build the shelves."

Sun, 01/06/2013 - 13:37 | 3127164 Jeepers Creepers
Jeepers Creepers's picture

If you make student debt dischargeable, you've essentially made college "free". 

So now janitors are getting money taken out of their paycheck so someone's little princess can get her 3rd Masters degree in Gender Studies?  Yea, that sounds fair.  If you start forgiving student loans, you're essentially going to have the entire United States becoming professional students.

If you want to make college affordable, get the government out of the equation to stop trying to make it affordable.  Same with housing.

 

 

Sun, 01/06/2013 - 16:06 | 3127512 Oracle of Kypseli
Oracle of Kypseli's picture

During the Vietnam war boys. will attend college to avoid the draft. Once the draft was abolished the colleges suffered greatly. That was most likely the beginning of the student loan campaign which is now way out of control.

My cousin finished medical school in Bucharest $3k per year. Think Grenada, South America etc. All you need is one year of language. If you can't learn the language in one year living in-country, you don't deserve a college degree.

 

Sat, 01/05/2013 - 16:25 | 3125593 HoofHearted
HoofHearted's picture

As a college prof, I say RAISE MY SALARY!!! Woohoo. We've got a lot of idiot students coming through, and we need to charge them higher tuition so that they can take advantage of this. 

(Needless to say, I'm being sarcastic. I bet only the administration will make any more money because of this bullshit.)

Sat, 01/05/2013 - 16:37 | 3125626 JPM Hater001
JPM Hater001's picture

I had lunch with my old Marketing Communcations professor who laid out 3 things:

1) His department was the only one with an effective internship and business project outreach program

2) His program was growing

3) The econ department could no be convinced to offer an econ class with actually useful items.

Of course neither of them had heard of Austrian Economics.

 

Sat, 01/05/2013 - 17:18 | 3125745 B2u
B2u's picture

I's sur reemembers alls the profissors i's hads.  theys gives me gud grades.  i's lookins for a grate jobs.

Sat, 01/05/2013 - 19:44 | 3126028 HurricaneSeason
HurricaneSeason's picture

Tri TSA and no pay debt.

Sat, 01/05/2013 - 19:55 | 3126053 nmewn
nmewn's picture

With all the cameras, watches & rings you can cart off as a fringe benefit!

Forward Comrade!

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