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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BlueCheeseBandit's picture

This is more lax, but not fundamentally different from the already in place Income Contingent are payment plan, which charges 20% of disposable income and is forgiven after 25 years.

The temporal cutoff irks me, I got my first loan 6 months too early.

This arbitrary bifurcation is going to piss ppl off. After all, ppl going into college at this point have enough information to know the risks. Ppl who started in the mid-2010s still had reason to believe in the system.

But then the purpose of the new plan isn't to help the average Joe, it's to keep ppl enrolling in college for the benefit of the education cartel.

Rustysilver's picture

Why can everybody follow Mitt's recommendation: borrow from your parents. It's so easy.

TruthBeforeAll's picture

Um, they are. But the government has to get it's cut first.

Dr. No's picture

I guess thats better than what is happening now, they are borrowing from their kids!

Smuckers's picture

When I graduated, I was accountable to pay back my loans. 
It was a moral responsibility to do so, and yes, I even blew some of the loans on whatever was iShit at the time.

You want the degree, then pay for it. 
Fuck you, get to work...and take those fucking earphones out of your head while you do it.


BlueCheeseBandit's picture

Did you graduate in the 1930s?

jbvtme's picture

the role of colleges and professors is to indoctrinate students in the ways of marxism and darwinism.  the fact that they all suck the public tit during the process is merely the cost of doing business for a civilized society.

Peter Pan's picture

As Mark Twain once famously said, "I never let schooling get in the way of my education."

debtor of last resort's picture

Advantage for government 'workers' is like telling the nsa your neighbour still has an assault rifle or silver burried in the yard. A rather dangerous aspect in this bailout, this worries me the most. Loyalty..... Kind of weird to see the 'land of the free' turning into some fascist commie state. It's going fast, just like over here in the Netherlands, a forced joint venture in a larger bureaucratic environment. To control the masses at the end of the debt super cycle?

To be honest, it freaks me out, control in almost every aspect of my life. Keep up your guns and your spirit Amerikano's!

sansnobel's picture

Sounds like its time to take out as many lines of "credit" as I can.  Give all of my personal posessions to my father and mother that I PAID FOR so they may not be pillaged, rack up as much debt as I can then sit back and tell Mr. Banker to go get made whole by the federal government.  I will no longer work on anyone's "payroll" anymore.  They will not steal another dime from me.  Yes I will be poor, but I'm sure they will have a SNAP card for me and a student loan package in no time flat.  I'm just going to gleefully join in the moral hazzard.  It pays to steal nowadays.  In a fucked up world of moral relativisim there can be no more sin.  Just suckers that go to work like slaves to pay for the large living ways of others who sit on their fucking ass 24/7.  Thank you very much slaves!!!!!

QQQBall's picture

Pay people not to grow food.

Pay people not to work. Then pay for their medical fees and feed (SNAP) them.  

Forgive mortgage debt.

Forgive student loan debt.

Backstop the automotive, real estate, insurance and banking industries - & fund the Military-Industrial Complex.

Drive stduents to and from school.

Provide breakfast and lunch at school

Provide after-school and pre-school  

Did I miss anything?

 Where is my bailout?

francis_sawyer's picture

@QQQ ~ joobux have magical properties...

logically possible's picture


I see job creation for another 30 years in your list.

icanhasbailout's picture

Let's be honest here - students are largely brainwashed into taking out these loans, they are heavily conditioned in prison schools and by media, and then taken advantage of in a huge way from the moment their signatures can legally ink a contract. This is the market in paid-for government seeking the greatest possible fool and finding it.


The alleged "I'm taking out student loans so I can buy consumer indulgences" is an extreme rarity, if not a total myth. Most of these kids are doing only what they are coerced into doing, having no understanding whatsoever of what is going on.

Peterus's picture

Entire culture tries to hide from responsibility. Leaders never die in war. Largest corporations and banks are the first in line for help when they make bad decisions. Entire generations are plundering their own children and grandchildren by public spending on credit.

Out of all bailouts this one is the least "evil". If anybody should get an extra chance on someone else's expense it's the kids.

Bazza McKenzie's picture

Agree with your main point.  However, the main plundering going on is of the savings of the middle class, through interest rate suppression, inflation and looting by the financial sector, and current expenditure of social security contributions.  That will all leave severely restricted retirement benefits for current retirees and those near retirement, ie those who have tried to lead responsible lives and not "hide from responsibility" are being asset stripped for the benefit of those who have been irresponsible.

The "debt" will continue to be financed indefinitely by the Fed, so it will not be borne by taxpayers in the distant future, though the high rates of inflation will steal from all those who produce real goods and services and most of the population will suffer the inevitable consequence of an ongoing contraction in the production and availability of real goods and services.

tip e. canoe's picture

except in this case, the "kids" are just being given a second chance to become more deeply mired in debt.

Bazza McKenzie's picture

Hey, they're old enough to vote on how to run the country.  They presumably have finished high school at a decent standard if they're getting into college.  But you're telling us they're not competent to run their own lives.

I'm inclined to believe that last point but it does suggest serious problems with the prior two.

Radical Marijuana's picture

"presumably have finished high school at a decent standard"

However, never informed about how "money" is made from nothing, because the biggest gangsters, are the privatizing banksters, that have applied the principles of organize crime to take control over the government, in order to legalize counterfeiting, and force everyone else to accept that.

"Finishing high school" merely means you were already brainwashed by the "education" system that the banksters set up, in order to make sure that young people would be brainwashed to believe bullshit, and never actually understand the society that they were born into!

See the previous article on Zero Hedge:

The Banking Elite are Not Only Stealing Our Wealth,

But They Are Also Stealing Our Minds

Our children are front end loaded into a mental meat grinder! They are being processed into masses of muppets, that will vote for puppet politicians, to keep the banksters and their buddies in power.


lakecity55's picture

cloward-piven, comrades!

forward, soviet!

Waterfallsparkles's picture

I had students that wanted to rent from me.  When I asked them where they worked they said that they would pay with the Money from their Student Loans.  Unfortunatly, the Student Loans give them enough Money for their Housing and Food expenses during their time in Collage.  Heaven forbid they live with their Parents while attending Collage.

So, many of these people with Student Loans spent the Money on Housing, Food, I Phones, etc. and now do not want to work or pay for those Loans.  They act like it was Welfare of something.

Now, all American Taxpayers will pay for their Housing, Food and College Tuition for 4 years without getting the benefit.

But, as I said the Banks are the ones on the hook right now and they want to pass the Liability on to the Tax Payers as usual.

JR's picture

Exactly. This an eye opener, Waterfallsparkles, on exactly why this banker planned economy is collapsing. When the producers get their bill in 2014 for Obamacare, which according to Aetna’s CEO could double premiums on the same basic policy as today, it’s game over.

Obamacare, coupled with Studentcare, is a country sinker. It isn’t that the producers won’t pay, they can’t pay. This banker-controlled Congress can’t keep this up; this assault on the private producer is going to cut jobs, cause bankruptcies, destroy the futures of both old and young.

The Congress has passed a suicide pact -- at the same time they keep increasing the money paid out, they keep bringing on more deadbeats.

With a stroke of the pen, they've committed the country to suicide.

laboratorymike's picture

It isn’t that the producers won’t pay, they can’t pay.

We have a winner! If there is one thing I learned in college, it was the Mr. X doctrine which stated the one sure solution of ending communism, and by extension all totalitarian societies: resources and resource producers are finite, state appetites are infinite, and eventually the resources run out. The system only lives to the extent that new sources of wealth can be looted, and we're fast approaching that point of not having much more wealth to loot.

JR's picture

You know what, if there’s anything to add to what you have just said, I have no idea what it is.

+100! laboratorymike.

lizzy36's picture

This is just one example of what has happened at Universities in the last 12 years.

From the University of Chicago:

Tuition 2000 - 2001 = $24,807

Tuition 2012- 2013 =  $43,851

From 2000 - 2010 median wages declined by 7% in the USA (adjusted for inflation)

Changes for Full Professor Salary from 2000 - 2012 = +$79,300 from $118,500 in 2000 to $197,800 in 2012 (to say nothing of medical and pension benefits). 

Associate and Assistant Professors also saw their pay go up by 50% over the same time period.

JR's picture

The universities are out of control. They have to have the tuition to pay the professors, even though the professors aren’t there to teach; it’s some graduate student who does the teaching.

This really piqued my interest, Lizzie. Taking it a step higher to the presidents of the public universities, I see Ohio State University President Gordon Gee came within a few thousand dollars of earning $2 million in total compensation in fiscal year 2011.  His total package a year earlier was just $1.3 million. A nice raise!

Texas A&M Chancellor Michael McKinney earned nearly as much, $1.97 million to Gee’s $1.99 million, per this latest analysis by the Chronicle of Higher Education

Said the Washington Post in May: “The annual Chronicle survey shows a rapid rise in top executive compensation in the public universities...   Governing boards are probably mindful of such milestones, just as they are mindful of being the first (or second, or third) institution to charge, say, $40,000 in private tuition.”

WP post writer Daniel de Vise added this caveat: “I should hasten to add that the top private university presidents earn significantly more than their public counterparts.

The survey of 190 public institutions and university systems found median total compensation rose 3 percent to $421,395.

As to how benefits add to the public employee's compensation package, the University of Michigan reports President Mary Sue Coleman’s base pay is $585,783 while her total compensation package is $910,700 per year.

Thanks, Lizzie. 2013 is going to be a level 9 on the economic Richter scale, no doubt with major quake damage and lots of casualties.

geekgrrl's picture

The administrators are the ones raping the system. Tenured professors are also beneficiaries, but associate and adjunct profs are getting poverty-level wages and this is the trend of the future. And for all those folks who think tenured professors are by-definition liberals, I have a pile of evidence that says otherwise. Most of the engineering profs at my uni were getting massive DOD contracts and my, oh, my, did they suck on that government teat.

Peter Pan's picture

Student debt is in a bubble as are education costs. Too many graduates for non-existent positions or jobs for specific degrees is also in a bubble. As the witches in Shakespeare's Macbeth said (if I remember correctly) "bubble bubble toil and trouble."


sablya's picture

Double, double toil and trouble.....Macbeth is so 17th century!  There is no more toil and trouble.  The modern Shakespeare reader has bubble, bubble, daily double, no concern, no trouble.

g3h's picture

Buy for-profit educational company stocks!

JR's picture

This is not poor planning; nor ineptitude. The student loan bailout is the latest banker-created takeover of yet another segment of the free enterprise system. The international bankers are simply using the principles of usury to steal the money by creating “student loan insurance” to artificially hike the price of higher education and stick the taxpayer with the bill. This is yet another malinvestment feature of central bank planning that destroys the private market synchronization of supply and demand. 

Malinvestment is an inevitable byproduct of credit bubbles.

As Radical Marijuana pointed out in September on ZH: “The fundamental ‘malinvestment’ insanity flows from the fact that young people are enslaved by ‘loans’ which created the money they was lent out of nothing, but their promise to repay. Students are being steamrollered by the basic bankster scam!”

When will Americans all recognize that this is intentional grand larceny, i.e., the creation of financial bubbles bringing on debtors and pushing them so far under water that the politicians are obliged to clip the taxpayers for the bailout…and the bailout is more taxpayer-financed government debt to enhance the wealth of the bankers, redistributing the wealth of the nation to the non-producing “TBTFs.”

Mark Twain suggested there was no actual criminal class in America except for Congress. Had he lived, he might have recognized the more obvious criminal class, the international bankers.

Radical Marijuana's picture

Thanks for the quote, JR! If I knew I was going to be quoted, maybe I would have proofread my grammar better, and corrected "was" to "were" because "loans" is plural?

I regard the student loan issue as being very SYMBOLIC of all the banksters' control. As Griffen said, the river of fiat money made out of nothing is so wide, it looks like an ocean. A $trillion in student loans is relatively trivial, inside the context of the bigger fiat money story. However, enslaving young people by "loaning" them "money" made out of nothing is EVIL! That kind of corruption is effectively our so-called civilization cannibalizing its young. For decades I have been repeating the truism that the younger you are, then the more you are being lied to, cheated, and robbed by the political system you were born into.

Peterus's picture

Forgot step 7: Vote.

geekgrrl's picture

Yet another mis-allocation of resources. I know a twenty-something that had a music major, and managed to rack up over $100k in debt. WTF kind of job (besides rock star) is going to have any chance of paying that off? It's just ludicrous. The government should not be backing student loans, period. It removes all the risk to lenders and just like the cost of housing, the cost of "education" is massively inflated in price simply from the flood of easy credit that flows into the system.

As Reggie showed in his article on the student loan debt, most students aren't even able to do the basic math to calculate the payoff and relative advantage/disadvantage of a college education; they're just following a mythical script about the benefits of having a college education while paying little to no attention to the costs. But I don't blame them because the whole culture perpetuates this myth. ZH is one of the few places where the benefits of getting a college education is challenged by honestly portraying the real costs.

All that being said, the real beneficiaries here are again the TBTF banks. I appreciate the feelings of folks here who are disgusted by people taking advantage of "freebies," but I don't really see it that way. From what I can tell, the modus operandi of the banks is to get as many people as possible into perpetual debt. Once they have you hooked, they're in control, and going forward I think they will be leveraging the power of the State to extract their pound of flesh, and freedoms of all sorts will be affected. I've been debt-free since 2007, and I'm never going back. There's no carrot they can dangle that would induce me to take on debt; I've already seen the shadow of the stick first-hand and want no part of it.

Miffed Microbiologist's picture

Well said geekgrrl! It's great to see some younger people not hoodwinked by the scam. I get very weary listening to the 50+ group complaining about the teenage to 30 group. Yes, they do seem lost with only shiny baubles to comfort but their world is bleak and will continue to be so for years, decades to come. Kind of reminds me of a story someone told me about a little girl in Japan after Hiroshima. When they pull away all the wreakage, there she was just singing and petting her doll. At 51 I'm thankful I still have a well paying job that still, so far, put food on the table. I was fortunate to be able to pay off my student loans (16,000 in 1987 paid off in 1993). But like many others I have faced there is no way I can retire. The numbers don't work. Even if we simply to the extreme Bens inflation will eat us alive. Funny thing is there is a great need for microbiologists. However to get my position one has to pay 25,000 for an internship on top of a four year degree. In my day they paid us a 300/ month stipend! So I'm going to die on the job and no one can afford to train to replace me! Just brilliant!

I was hoping to say some words of encouragement and Ive just got myself depressed! Mr miffed says that's a sign of too much ZH and I need a bit of USA Today for some happy happy joy joy. Ok, I'll give it a try


geekgrrl's picture

I'm 48 and also took out 16k in loans a few years after you, which I was able to repay in about 5 years. I actually looked at the cost/benefit numbers before starting college, and it was clear at the time that the benefits would far outweigh the costs. Not true today for most specialties. I also was able to get a postgrad degree paid for by a corporation, and I paid for another postgrad degree myself (cheap state school).

I'm also grateful to have a decent paying job, and more than a few times it has struck me how lucky I am relative to others and that to a large degree, this luck was not of my making. It only came about because the turnover in Asia among engineers is so fast that very few people have any kind of institutional knowledge of what has been done in the past. 

As for retirement, it is my belief that it is essentially impossible to predict circumstances in 2030, and that the probablility that the US Dollar is still in existence is close to zero. I think my chances of being killed in a BNC sort of an event to be much more likely, so why plan for a non-existent future? Sorry to be even more pessimistic, but I think it would be hard to over-estimate how bad things are going to become.

Miffed Microbiologist's picture

Wow, I thought I was pessimistic! :-) well maybe it's more facing reality vs pessimism. For years both mr miffed and I have fought the outsourcing of our jobs. My husband graduated in computer science in the early 1980s. In the 90s it was clear his job would be going overseas so he climbed fast into high level development, architecture. He and a few others are the development brains of the company and will only lose their jobs if the company colapses. He's early job has been completely replaced by Indians and Chinese. Funny thing, they all have PhDs and he has a BS. Most routine lab work in my field has been replaced by Filipinos. Many were drs in their original country. When micro and molecular become more automated I will have to move into administration and management which I have no interest. Unfortunately I won't have a choice. My mother- in- law retired at 60, traveled the world for 20 years and is living very comfortablly. She still tells us we should save our shekels in a jar and then can live as she. Before it use to piss us off but now we just laugh. In her day, you worked at one job and retire with a great pension. Today we are constantly sniffing the wind for any sign we may lose out job for not being competitive . Maybe global thermonuclear war would be an easy out... as long as I catch the bomb.... Wouldnt want a slow lingering death. Ok back to happy happy joy joy.


geekgrrl's picture

I'll never forget my mother telling me that "As long as I'm dead before things fall apart, that's all I care about." (paraphased)

It seems very clear to me that things are coming to a head, and that it will only be a few years before this all falls apart. Those multi-million dollar public pensions will turn to dust, and that will be that.

Miffed Microbiologist's picture

Well, I've open a bottle of Syrah from a friend who we help harvest their grapes every year. This was an especially great year for them, they won a silver metal on this wine amid thousands of other entries. Funny thing was after we harvested that year, a few hours later the whole thing nearly burned down in the 2nd largest fire in San Diego's history. So out of misery and almost losing their lives they have this wonderful wine. So I lift a glass to you geekgrrl and all my other friends here that in this hour of hopelessness, dispair and darkness there may be some hope and happiness after all is said and done. Wishing you the best and hope so see you well on the other side after the shitstorm has finally passed.


geekgrrl's picture

Thanks Miffed.

My best wishes to you and all your kin for the coming year.

IridiumRebel's picture

This is fucking great! University of Hooked on Phonics here I come! I be da majoring da in da South Canadian Art Historys da. Where my gubmint checks?

Tombstone's picture

No end to socialist bailouts, Komrades.  They will have a lock on the voting block for many decades as long as Benny supports all this silly central planning.  Another 5 year plan anyone?

BurningFuld's picture

Of course we have to blame the students for tuition going up. I mean they are the ones setting the tuition rates aren't they. 

OR  Could it be the fact that the private (Businesses) schools are run for profit and are going to milk the system for every fucking dime they can get.  Hard to say.

I am Jobe's picture

Expesive hookers and pimps one must say, Idiot inbred fucks still pursuing a dream which is to falter

Dumb Amerikans


Monedas's picture

The end will be near when the government gives grants and forgiveable loans to welfare fucks to buy gold .... and not be left out in the cold !

Monedas's picture

Imagine getting student loans for Sex Workers Technical Institute ?  Holy raging rectums !

I am Jobe's picture

Coming soon Whore Universities across Amerika

Blame the inbred fucking parents who think they made the right choice, sure they did grooming their daughters to be hookers and sons to be pimps. Never a dull moment in Amerikan inbred fuckhole.


Setarcos's picture

Seems that you have some personal experience of all this.  Your family life was perfect eh!