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 "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, 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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willwork4food's picture

I want to study international women's physiologies.

Dr. Sandi's picture

You can definitely do that online.

Hell, you can probably even get a student loan and a degree in it from some reputable diploma mill like University of Phoenix.

XitSam's picture

Students as FEMA guards. Yeah. Reminds me of the Stanford Prison Experiment.

Bad Attitude's picture

Been to a US airport lately? The TSA hires people with few skills, gives them a badge, a uniform, and authority over others. The Stanford Prison Experiment was just an experiment. The TSA is for real.

Ghordius's picture

pls watch carefully and attentively when in airports
Plenty of people like it. Incredible but true

Esso's picture

If they had skills they wouldn't be working for the goobermunt now, would they?

Oleander's picture

Been to a Federal Bldg latey?  Lined up outside, they were letting two people in at a time. Shoes, belts, coats off. This was in Providence last week while temps were in the twenties. Stupid guy yelling "This is how its gonna be from now on, bla bla bla". 

We are all owned. Its over.


Dr. Sandi's picture

Stop playing.

It's not easy, but you can do it in stages.

QQQBall's picture

+100... Once you are in the camp, they will asset strip you to pay...

ultimate warrior's picture

Starvation will be a bigger concern than having student loans being forgiven in 10 years time.

cynicalskeptic's picture

Expect a replay of the 1919 Influenza - on a larger scale.  I'll bet on an avian flu in Asia spreading rapidly taking out a big chunk of Chinese and South Asian populations (coincidentsally the populations whose consumption is growing the fastest).  Africa will be hard hit (opening the continent's raw materials to better organized exploiters).  The poorer classes in Europe and the Americas will die off in large numbers as well.  BUT if you have the money you can buy salvation courtesy of hard working pharmaceutical companies.....   Terrible terrible event - akin to the Black Death in the Middle Ages BUT as with that event teh survivors are much better off.  With a geratly reduced population, those that live through it will have a better time -  less competition for the remaining resources.  

One way to buy some time.   Echoes of V for Vendetta - and all too plausible.  Is this why the US isn't so afraid of China?

CClarity's picture

Basically, between unlimited student loans and unlimited unemployment benefits, the government is "admitting" that we are now paying citizens to consume.  Our economy can't grind on without endless consumption, so since robots (and robocalls) have replaced menial workers and even cogent telephone receptionists and bill handlers, we must now pay people to conduct their new careers - that of consumer, plain and simple.

Just watch folks.  Our grandparents would have thought this crazy but maybe our great great great grandparents would get it back in the serf and lord days.

toady's picture

I really hated it when we stopped being citizens and became consumers. Consumers are dying breed. There can only so much consumption in a finite world.

jplotinus's picture

It would be better still to guarantee the availability of a job with a livable wage and medical and pension benefits for everyone who wants to work. It is regrettable that allegiance to capitalism prevents so many from focusing on what is actually needed to advance post industrial societies. It is, after all 2013, not 1913.

AldousHuxley's picture

student loan bailout = incentive to go back to school = youngsters back in re-education prisons and off the unemployment record and off the streets from protesting the status quo of nincompoops


= mission accomplished short run to continue outsourcing of all jobs to Asia.

WestVillageIdiot's picture

You knew this was coming the moment ShObama took over the student loan market, praising how it would "avoid the middlemen". 

Buying votes and creating good little government loving thugs ain't cheap.  We have turned into a sick society.  Mindless drones sucking down soma and watching their telescreens, praising Big Brother as he hands out their ration of victory gin and chocolate. 

Landrew's picture

Just for the record, O'Bummer did NOT take over the student loan market, that would be the SHRUB in his fait accompli!

yakmerchant's picture

I'm with you man. But I just want to be given a job where I don't have to work very hard. While you are guaranteeing things lets forget the living wage and go ahead and put me in the politburo so I can live in a mansion and drive a Bentley. Oh and my brother's kind of slow maybe we can make him in charge of pointing guns at the farmers because when you make sure everbody has a living wage it's going to cause inflation and then you are going to have to put in price floors and then the farmers aren't going to be able to make a living so you'll definitely need to go full Joseph Stalin on their asses. That whole free market thing sucks, all it takes to overcome it is a few revolutionaries like us willing to hold a gun in someones face and tell them their hard work belongs to us. Peace, bread and work brother.

donsluck's picture

Odd post. How do you "guarantee" a job to a sociopathic jerk? What is a "living wage"?

WestVillageIdiot's picture

How much does a senator make?  That should give you an indication of the market price of sociopathic jerks. 

TPTB_r_TBTF's picture



  • How do you "guarantee" a job to a sociopathic jerk?

Put the guy in a prison work program.


  • What is a "living wage"?

A handfull of beans mixed with a handfull of rice.

Dr. No's picture

His idea of great R&R was cold rice and a little rat meat.

Rogue Trooper's picture

Started in the USSA... Ironically, supported by City and Local Government Bureaucracy. Centrally planned madness.....

Irelevant's picture

Great! Forward! We will have Phds.

laboratorymike's picture

And then we will be just like late 1980s China, where a PhD could net you a job as a sausage cart operator.

Chump's picture

Better than a decade before, when a PhD would've netted you a bullet in the head.  Progressive!

fonzannoon's picture

i'm going back to school.

Unprepared's picture

Time to go back and do that financial engineering PhD.

libertus's picture

Now that it has burst. Maybe my predictions for what happens next will be correct. Check out this link.....I didn't call the time, but I did can the reasons behind this disaster.

Joebloinvestor's picture

Bring back debtor prisons.

I bet that stops a lot of defaults although that may be the safest place to be when it all turns to shit.

Dr. No's picture

Debtor prisions are bad.  Bad debt is a civil issue, not a crime.  Fraud, maybe, that is criminal.  But if you cant pay your student debt because of hardship, you should have the right to bankruptsy.  The gov and banksters need to pay some penalty for loaning to a 20 year old $100k, thats just stupid business.

Joebloinvestor's picture

BK does not discharge student or credit card debt.

Dr. No's picture

Everyone knows SL can't be discharged, I said they should have the right to. You think they should get tossed in prison for a non criminal act.

Joebloinvestor's picture


Start siezing property and the rights to any intellectual property produced.

mercenaryomics's picture

Until the students rebel and guillotine the ones doing the seizing. Historically this is rather commonplace. 

laboratorymike's picture

The penalty is that the government stops guaranteeing the loans, and the banks eat all of the losses on their bad loans. People then find working alternatives to the university system if they are smart and cannot afford to go. Problem solved.

lizzy36's picture

Colleage Tuition has gone up 5 fold since 1986 versus cost of living which has doubled.

Here is an idea, instead of this bullshit loan forgivness program, why not try and CONTAIN COSTS. I don't know say cut professor and adminstrative salaries/benefits. Cut tenure awards. Cut pension benefits. 

And can anyone tell me why a "bank" can borrow from the Fed for nothing and students are paying 8%-16% for their loans. Would seem to me instead of this loan forgivness crap, why not charge students 2-4% for their loans.

Finally, there should be a disincentive to getting a "public-service" job. Like loan forgiveness after 30 years not the typical 20. 

So if one is a productive yank citizen, working in the private sector, one gets to pay for student loan forgiveness, medicare, medicaid, social security for warren buffet, and the continued never ending TBTF bailout (bc C, AIG, GM etc, got almost a trillon dollars of tax credits, which means they ain't paying for shit).

Well yanks like to do everything bigger than any other country, including the welfare state. 

WestVillageIdiot's picture

When tyrants masquerade as "liberals" this is what you are left.  The police state grows with promises of rewards, not threats of punishment. 

francis_sawyer's picture

 "I don't know say cut professor and adminstrative salaries/benefits. Cut tenure awards. Cut pension benefits."


So you want to take money away from Saul Alinsky protégés?... How would we ever become properly brainwashed afterwards?


Here's the francis_sawyer perspective on social engineering experiments (scientific or not)... "You can't train cats to be dogs"... [& either a good guard dog or hunting dog is your best friend... BOTH ~ if you're lucky]...

Landrew's picture

Oh really, so you think you can do a better job teaching? Then have at it! Please work for less, I doubt you will. Six years of school I doubt it!

zerozulu's picture

"why not charge students 2-4% for their loans"

sure but only if they want populous to be educated. Uneducated and illiterate population is unable to think for them-self and always will be pawned.


laboratorymike's picture

Here is a simple solution: end the practice of student loans. Students will stop going, or do like a friend of mine and work their way through school, taking two classes a semester. Having gone through the system and haivng taught myself skillsets outside of my classes I've realized that college is overrrated if you want to "be enlightened." Go if you want to acquire a professional skillset, otherwise hit the books on your own time, and go to night school for a bachelor's/associate's. My friends who did this have been working and earning for years already, my parents have managed to put my sister and I through college and my dad realized his dream of building a very nice house with his own two hands. Meanwhile, the kids who majored in something that ended in "studies" are graduating with a mortgage and no house.

Again, go to a university if you have a specific professional skillset you want to acquire (JD, PE, MD, PhD, DDS, etc.), and are reasonably sure you can get it. Otherwise, don't go.

nmewn's picture

Yes, she is a part of the Crown empire.

That's why they don't have much a problem with welfare, the royal family has been on it for centuries ;-)

Random's picture

U.S. is part of the Crown, do a bit of work and you'll find out.