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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busted by the bailout's picture

Perhaps.  But I don't blame the kids, or the people in general.  It's the system; it has become rotten to the core. 

We are in for more hard times in the years ahead, and as adversity builds character, hopefully it will also "rebuild" our system.  We have lost the values that made this country great, and it won't change until we get them back, imo.

Cathartes Aura's picture

upvoted for acknowledging it IS the system that most duck 'n' dive in, and until more people realise the system is in place to suck them all dry, then discard, then the system will continue to perpetuate itself.

Salon's picture

Wow even if somebody makes $100,000 per year their max payments over 20 years is $200,000 (less actually since it is ten percent of discretionary income).

Max out the loans baby! Go $400,000 in debt at the most expensive undergrad and grad programs you can find.

Dr. Sandi's picture

I tire of merely being a PhD. I can't help but think I should go for that MD paper I've always coveted. Get a monster student loan and convert it to gold.

Anybody know a really fine medical school that will let me have the loan money first, before I send them a check?

TWSceptic's picture

"It's a very good safety net for students who borrow too much," says Mark Kantrowitz"


You can't make this shit up, you really can't.

acidradio's picture

To be honest I think *ANY* amount is too much to borrow! Everyone in my parents' generation and before was able to go to school for a reasonable CASH price. They all worked hard at some kind of summer job and perhaps with a little help from their family was able to go to school without taking out loans. Now? I could buy a house for the amount of money that it takes, it's basically impossible without going into debt. Schools back in the day were about school. Between tuition money, some state funding, donations from successful alumni (you kind of had a social obligation to donate to your alma mater if you made money) and good management and cost controls this was all possible. And now? It's just a fluff job program and propaganda machine for ultra-liberals who can't cut it anywhere else in the real world.

Getting Old Sucks's picture

Catholic grade school in the fifties to sixties: $15 every six months.  Catholic HS in the sixties: $20 a month.  Community College in the sixties and seventies: Free.

Not going to go over what it cost to educate my four children but we're still in the one bedroom apartment we raised them in (no house for us).  They did and are doing well though so wouldn't change it for the world.

Pisses me off that if you're an illegal's kid, you'll go to school now for free and if you're a natural born citizen, you either fight a couple of wars or go into to debt for life to go to school.

We have to back, not FORWARD.

Laddie's picture

The “Hispanic Scholarship Fund” (HSF) says that it “aims to put a degree in every Latino household by 2025” through its affirmative action program in college recruitment.

Funding for the HSF comes from a large number of corporations, which, according to that organization’s website, include the FedEx Corporation; the Mazda Foundation; KLASS Time; GMAC Financial Services; Lowe’s; the McNamara Family Foundation, Inc.; Goldman Sachs; Procter & Gamble; Toyota Motor Sales U.S.A., Inc.; the Verizon Foundation; McDonald’s; Target; the Morgan Stanley Foundation; Nissan North America, Inc.; the Sallie Mae Fund; Wells Fargo; the Draper Family Foundation; the Shell Oil Company; the Wachovia Foundation and the UPS Foundation, amongst many others.

The HSF says specifically that it is only for “Latinos” and those of Hispanic descent.

It obviously does not concern these corporations in the slightest that their money is used specifically for non-whites.

On the HSF’s website, under their “Frequently Asked Questions” section, the policy is spelled out in no uncertain terms:

“Do I have to be Hispanic/Latino to apply?” is the question the website asks.
The answer is: “Yes. You or your family must be descended from at least one of the following countries: Spain, Mexico, Guatemala, Honduras, El Salvador, Costa Rica, Nicaragua, Panama, Colombia, Venezuela, Ecuador, Peru, Argentina, Chile, Bolivia, Uruguay, Paraguay, Cuba, Puerto Rico, or the Dominican Republic. Students from Brazil are eligible to apply.

Oleander's picture

From here on my child is Latino. He really is a desendant but now he will need to claim it. 

Jam Akin's picture

What's this about non-whites?  All of the decendents of the folks who had to leave Germany "suddenly" back in the mid-40's for various destinations in South America would appear to be eligible.  And the Italians from Brazil and Argentina too?  And for Asians, Toyota should be covering any Japanese who did a generational tour of Peru and Brazil?  Sweet Deal.  At least private money is picking up the tab even if their selection criteria are ever so slightly fucked up.

lakecity55's picture

No, no, no. The Media says Hispanics are White: "George Zimmerman, the White Hispanic who shot Treybon Skittles..."

W74's picture

It's this kind of transference from Responsible Actor to Victim which is at the heart of the left's ability to function.  Once you point out the flaw on their argument using this they have nothing to stand on, logically. 

Too bad we no longer follow or even care about logic anymore and if you disagree you must be a crazy/psychopath/racist/nazi/criminal/evil-dooer who needs to have their guns taken away and be locked (forcably) in a mental institution.

donsluck's picture

How is "Actor to Victim" leftist? Doesn't the right encourage this behaviour with it's bail outs of huge corporations?

uno's picture

ok who is up for spring break in cancun

knukles's picture

There's an app and a grant for that!

Conax's picture

For all of us who didn't get to college because we didn't have the wherewithal to go (in the dark days before everything was EZ credit and grants), I hope they remember their lowly employees put them through college and maybe pay them a fair rate.  Or at least their credit score should be hamstrung.

A lot of those college loan dollars go right up the noses of the college-bound.  I'm sorry for the job situation, but it didn't happen overnight. The hand writing has been on the wall since 2007.

bigkahuna's picture

As long as I can remember, the job situation has been bad, with the exception of the few years of the tech boom - that is. It is just going to get much much worse, thats all. 

To all the new liberal arts grads: Basket weavers, sociology, history, english, you name the bullshit wasted your time, your (err the taxpayer's) money, and unfortunately and likely your life unless you have the fortitude to go back and get an engineering or medical related degree OR get skilled in something RELEVANT!

BlueCheeseBandit's picture

Yeah, engineering is where it's at.

My friend got a Masters in engineering from U of M, got his undergrad there Summa cum Laude. That was a year and a half ago.

Liberal arts degrees are very lucrative, for the connected or the clever.

And we'll see how your medical degrees work out in a few years. Education, healthcare, and defense all exist in their current form because of gov largesse. When you think about it, a society in which everyone takes care of everyone else when they're sick doesn't make as much sense as it sounds. Reminds me of the idea 10 or 20 years ago that we would all be lawyers. How did that work out?

mendigo's picture

Had this actually been a bailout of students they would have simply forgiven the debt or limit the cost and time frame.
This appears to be an effort to keep the game going - otherwise the lenders and schools might take a hit.
As with Greece it is instructive to consider who is actually benefiting from maintaing the status quo.
And to think that some talk about the 47% who are seeking handhouts - it is the 1% that receive the serious money. Does any sentient being actually pay at a rate of 37% will that not be easily evaded with proper avoidance techniques. The only tax increase was on the 99.5%

tip e. canoe's picture

"This appears to be an effort to keep the game going - otherwise the lenders and schools might take a hit."

at least someone here can see this for what it is.    the zero payment was the tell.   gotta keep the young'uns on the monthly payment treadmill, even they pay "nothing".   can't have them be throwin their bills in the trash, credit score be damned, can we?    this is indoctrination at its increasingly desperate.

p.s. these 2 minute of hate posts are really getting boring, especially when they're filled with such lazy analysis and obviously written to whip up a frenzy.    you guys & gals are getting as blatant as those you claim are the source of all the problems.    apologies for the criticism in your house, but sometimes shit needs to be said.

busted by the bailout's picture

I finished both undergraduate and graduate school without any debt.  I worked my way through, but then I didn't go to a private school either.  I think this is still doable, but not many choose this route because it's not fun.

I've been a sucker most of my life too: never incurring debt, except for a mortage, never taking a second or a home equity loan.  I even operated a business for 20 years without any debt.

Saving used to be a virtue, now it just makes you a fool.

lakecity55's picture


I never applied for any loans. I worked 30 hours a week and got some tuition help from the old man.

Of course, I had a job when I got out and no debt. All I owned could be put in the back of my paid-for PU truck.

You guys are sayin' I could have scammed the system and got rich?

I never thought of that. A buddy in law school turned me on to Libertarians, so my guys never win, either.

I did get a nice rifle when my lawyer buddy got busted by the IRS and defrocked for a plan to escape income tax.

But, the rifle was stolen.

Once upon a time, I was told I qualified for Army Intelligence, which I figured was teaching other soldiers to increase their test scores. Screwed again. Those recrutiers will say anything. I just told my (youngest) son-in-law that story, but he thinks the Navy Recruiter has a jet fighter slot waiting for him. Let's just say I know he is not fighter jock material. (*sigh*) We all have our own learning curve....

Quinvarius's picture

I just did the calculator they offered.  If you have 100k in loans, are single, and make 40k a year, you will pay back a grand total of$46,560 over 20 years.  Your payments will not even be half the principal.

Cathartes Aura's picture

out of your calculations,

pay back a grand total of$46,560 over 20 years

that's the only real earned "money" involved, the rest is magic pixels balancing phoney books, yes?'s picture

But who has to work to earn the additional magic pixels to pay off the loan?

nmewn's picture

I'm still trying to figure out why I'm taxed instead of having a few more magic pixels take care of it.

Not actually, I know why...and I'm not amused by their attempt at control.

tip e. canoe's picture

and how much of that is compound interest?

Catullus's picture

At 7%, that's 10% of the FV of the loan.  Which the government is sure to pay the banks the other 90%.

q99x2's picture

That's what I'm talking about. Partyeeee!

centerline's picture

This is pure evil.  They are buying time regarding the rising defaults and at the same time increasing the potential for even more borrowing.  University costs and loans are about to go into the stratosphere.

The message there is desperation.  They really are between a rock and a hard place.  Credit creation at any cost.  Damn.  If did not know better, I'd say they are lighting the fuse on a blow off top.

There is even more in the message.  For one, I read this as "fuck you private sector" loud and clear.  But, funny thing is that the "public" promises sure smell like roach motel bait.  I suppose if you get it while it is good and put the earnings towards good use, then so be it.  Most people won't though.  They will drink the cool aid and actually be surprised when the party ends abruptly.

Also, look at the timetable... 10 years.  That ought to say we have far less left on the clock.

defender's picture

An interesting thing to consider is that the people that started college when the job market started to collapse in 2008 are just now getting to the point that they would have to make their first payments*.  I am sure that there couldn't possibly be a link between those two point /sarc.

*For those that don't know, the first payment on student loans come due 6 months after graduating.  This means that the latest round of non-payment comes from those that graduated in the fall semester of last year.

BlueCheeseBandit's picture

And you can defer payments for 3 years after that if you're unemployed.

So, yeah, this shit just got started.

hannah's picture

"90+ day delinquent loans soared from under 9% to 11% in one quarter."


the 11% number is incorrect...go back and do the math and research and take a look at the data. this is old news....

Money Squid's picture

So, what's wrong with drugs, motorcyles and tattoos? America has become a bunch of pussies.

bigkahuna's picture

Its all good when its on other peoples bank accounts.

LiquidityandLunacy's picture

Fuck it. Just discharge it all 


BlueCheeseBandit's picture

All existing loans should be discharged and future loans by government stopped. Immunity from bankruptcy nullification should cease. Student loans should be treated like anything else. Go convince someone to lend you the money if you can.

Then lets see how long the education cartel lasts.

Waterfallsparkles's picture

Just another Bank Bail Out.  It appears that the Banks are not being repaid for the Student loans.  I would guess that the Bank cannot collect on unemployed Students or people flipping burgers at Mc Donalds.

centerline's picture

It's more than that.  It is a shot of nitro to the credit creation machine.

Freddie's picture

It is funny, during the Bush years I sort of felt sorry for guys in the gun business or gunsmiths.  They were in a low margin business filled with customers who had no money and wanted to get the lowest price on any gun. 

Please note: I am not a big gun guy and don't hang out at shooting ranges.  Guns are like insurance to me.  They are hopefully tyranny insurance. I just hope the insurance works.

We will never be free but it can and probably will get a lot worse.  Yeah we could get to the Pol Pot stage.  Anything is possible espcially when the media, TV and Hollywood lie 24x7 and the sheep believe their shit.

Boy did the worm turn for the gun business guys.   Now I sit on my email waiting for an email that some ammo or mags are back in stock.  At 12:41 pm I got an email that Wolf .223 was back in stock at an online retailer.  I just clicked on the link and they are sold out again.  LOL!

Man I wish I had made a deal with the local small gun range and store a few years ago.   If I had offered to do a web business with them and split it 50/50 - life would be good.

Hope & Change.   After 4 years of this sh*t - the paranoia and fear is off the charts and going higher.

bigkahuna's picture

I want millions for my new student loan.

CelticCanuck's picture

For those of us here over the age of ......say..... 40, I want propose that we just step back and try to comprehend that a year at one of our illustrious liberal arts institutions will set us back $60k.
THAT alone says everything that needs to be said about the direction in which our country is heading.
Absolutely FUCKED

BlueCheeseBandit's picture

W/o the special status afforded to student loans, private banks would evaluate loan candidates based on likelihood of repayment. I think tuition would be a lot lower if it had anything to do with the value of a degree. This student loan scam is just a way for the government to fund money to the education cartel through the hapless students.

tip e. canoe's picture

yup, and don't forget the education cartel in turn funding the construction, contractor & RE developer goons.    not to mention the textbook cartel.

the circle jerk continues...

Dr. No's picture

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



jal's picture


A smart student, if there is one, would max out on student loans, grants, and any other source of cash flow.


Live cheap.

Use the seely bank.


Start your own black market venture.

Hide the cash flow/profit.

Repay zero back on your loans.

Eventually, Become the new millionaire capable of being free.