Student Loan Bubble Update: "This Situation Is Simply Unsustainable"

Tyler Durden's picture

The last time we looked at the most underreported debt crisis sweeping the land, which is nothing short of the second coming of subprime, namely the student loan bubble, we posted "the scariest chart of the quarter" in which the Fed had finally caught up with our prior data showing that student loan delinquency had soared to some 11% from the 9% reported in the previous quarter, even as the Fed disclosed it had issued some $42 billion in Federal student loans in the same quarter, and a cumulative $956 billion, a number which as of December 31 is certainly over $1 trillion. This number was lower than the one we had shown previously, or a default rate of some 13.4%, sourced by the DOE. As it turns out both we and the Fed were optimistic.

According to just released data from Fair Issac:

Research by FICO Labs into the growing student lending crisis in the U.S. has found that, as a group, individuals taking out student loans today pose a significantly greater risk of default than those who took out student loans just a few years ago. The situation is compounded by significant growth in the amount of debt that new graduates are carrying.


The delinquency rate today on student loans that were originated from 2005-2007 is 12.4 percent. The comparable figure for student loans that were originated from 2010-2012 is 15.1 percent, representing an increase in the delinquency rate by nearly 22 percent

And since there is always a lag between getting the full cohort remittance and delinquency data, the real bad loan percentage is likely in the 20%+ category. So $1 trillion in federal student debt now, 20% delinquency, means $200 billion in loan defaults with zero collateral. And rising fast.

This is on par with the amount of subprime loans that was expected to end in foreclosure, yet another number that was vastly optimistic and would have been far worse had the Fed not stepped in to bailout the entire financial system.

And it gets worse. According to FICO:

While the delinquency rate is climbing, the average amount of student loan debt is increasing even faster. In 2005, the average U.S. student loan debt was $17,233. By 2012, it had ballooned to more than $27,253 – an increase of 58 percent in seven years. By contrast, the average credit card balance and the average balance on car loans owed by U.S. consumers actually decreased during the same period.


In a related finding, FICO’s quarterly survey of bank risk managers conducted in December 2012 found that nearly 60 percent of respondents expected delinquencies on student loans to increase over the next six months. The same respondents expected delinquencies on all other types of consumer loans to decrease, putting the pessimism around student loans in sharp relief.

So not only are loans accelerating, but the actual amount of any given loan is rising exponentially.

Some of FICO's scary charts which nobody will pay attention to until it is far too late.

The total percentage of US population with 1 or more student loans has increased from 12.1% in 2005 to 19% in 2012.

The consumer may be deleveraging... in everything but student loans that is: a 58% increase in the average student loan notional in seven years.

And nearly 1% of the population has over $100,000 in student loans!

* * *

FICO's assessment is round in line with outs. "This situation is simply unsustainable and we’re already suffering the consequences,” said Dr. Andrew Jennings, FICO’s chief analytics officer and head of FICO Labs. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever-larger student loans without greatly increasing the risk of default. There is no way around that harsh reality.

Yes there is: PRINT!

full FICO report below  

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Thomas's picture

How does one unsustain it? Seems to me contract law will block some solutions. I would like to see the government simply say to the banks, "It's your problem collecting this debt. Don't look to us for any help."

camaro68ss's picture

hahahaha,this S*** storm is getting better and better by the day. all you can do is laugh lolz

Thomas's picture

The carnage inflicted upon an age bracket that really didn't fully grasp the subtleties is enormous, however. Academic studies (that's code for studies from clueless academics that are somehow supposed to know what they are doing) show that those who enter adulthood into this kind of limited job market never fully recover. Throw on top of that student loans and you have a scarred generation.

I was talking to an opthamalogist. She's living the American dreams--successful as hell--except she cannot even  afford a starter house. If the doctors can't afford houses, don't gloat; be afraid, cause something is wrong.

Manthong's picture

You cannot slow student loans or entire sectors of the economy will collapse..

alcohol, spring break hospitality, tattoo and piercing salons, college town law enforcement, planned parenthood clinics, venereal disease clinics, smart phone and Internet services, the rap music industry, reality television show entertainment.. and there is even some marginal benefits to colleges and staff.   

These industries are vital.. they’re about all we have left in America.

SilverIsKing's picture

So do you recommend that the banks continue to lend money to those who have no chance to ever pay it back?

Manthong's picture

They cannot herd everybody to the destination on the road to serfdom if they don't.

Muppet Pimp's picture

If history is our guide, Sallie Mae S:SLM (the Student Loan GSE) has a long way to fall from 16 and change to the pink sheets like siblings fannie and freddie.  Wheee!

SafelyGraze's picture

the solution is as simple as it is obvious: in order to pay off large loans in a down economy, students must aim at higher rungs of the employment ladder.

to do that, they should continue their schooling to earn MS, PhD, and professional degrees, and to take multiple (unpaid) internships overseas.

employers will be snapping up students with those credentials and paying them top dollar

Manthong's picture

Geezus.. I forgot to mention the video gaming industry.. if student loans are cut back not only will a huge chunk of the software and hardware business go down, but we would lose tens or hundreds of millions of valuable man hours of informal special ops, fighter pilot and drone operator training.

caconhma's picture

Lately in America, education became a business enterprise combining educational & banking institutions backed and supported by the government. It main goals are to indoctrinate and defraud their customers and clients.

Stares straight ahead's picture

These "kids" ( one I know is 33 years old) are using the loans to subsidizetheir income. They may not even really intend to achieve a degree. They just sign up for the loans and a few classes and this allows them to live above their means. It's sickening.

TheFourthStooge-ing's picture

SafelyGraze said:

they should continue their schooling to earn MS, PhD, and professional degrees, and to take multiple (unpaid) internships overseas.

employers will be snapping up students with those credentials and paying them top dollar

must...stop....laughing...can...hardly breathe.....


Please don't tell me that you've quit your job to become an Herbalife distributor.

Parrotile's picture

Herbalife's so "Last Year". Keep up with the market - go for Craze

In two exciting flavours too!!

Thomas's picture

I think he was being facetious.

SafelyGraze's picture


backward ? copy/paste from wikipedia link   

html copy/paste from same link    "⸮"


Fleecer's picture

$200 billion in loan defaults with zero collateral.


... what about eternal wage garnishment, or ultimately a reduction of SS benefit?  Thought student loans were the only loan you truly can't walk away from in bankruptcy?

lemonobrien's picture

slave for life bitch; now suck it.

Groundhog Day's picture

Their is another way out.  When the next war starts, they will offer these students debt forgiveness for being a good patriotic citizen.  I can see the advertizement now.  "Play call of duty live and win a chance to have your debt forgiven"

wisefool's picture

Service means citizenship! Would you like to learn more about the planet Clandathu?

Parrotile's picture

Seeing as it's populated with very large bugs farting plasma bolts, I'll give this one a miss if that's OK by you!

(I'm sure there are better venues locally - just checking my updated version of "The Hitch-hiker's Giude to the Galaxy")

trollin4sukrz's picture

WTF troops, do you want to live forever? CHARGE!

AustriAnnie's picture

Who needs bankruptcy?  Everyone gets to walk away from whatever they still owe after 20 years.  (Or 10 if you work in public "service".)

The trick is just to pay as little in until then as possible.  Student loan payments are just another form of income tax now, you pay a certain percentage of your income, according to your "ability".  Interest paid on student loans just decreases your regular income taxes, so you are really just trading student loan payments for taxes.  And this way, the banks and retailers get a cut out of the deal.  

They are now socially engineering by controlling student loan payouts and payments, just as they have already socially engineered through the income tax system.  (With social security probably next on the list: If you do A, B, and C, you get more social security than if you do D, E, or F)  

Its just another way of bringing consumption forward to engineer profits for banks and corps, while paying public servants to administrate/regulate it all.  The responsible students pay it back and forego consumption for decades in order to make their payment on a frozen or falling wage, while others who check the right box on a form get the money back through entitlement programs or government sector pay increases.


Doomer's picture

Exactly.  The idea that this is unsustainable is just wishful thinking by people who long for the good-old-days when the goverment didn't back-stop everything and money printing was taboo.  The goverment will just pay off the bad loans and add that debt to the national debt.  People will work until they die, paying the interest via their taxes, as long as the TV stays on, the cheap beer is on the store shelves, and the pizza gets delivered.  This is the Matrix folks.  The time when it collapses on its own is so far out, it can't be predicted.  It will take some kind of epic ecological disaster  or massive computer sabotoge kill the system.  There is plenty of fuel and grease to keep this machine running.  Only a monkey wrench in the works will stop it.

SeattleBruce's picture

"The time when it collapses on its own is so far out, it can't be predicted."

We may not be able to predict it exactly, but I doubt it's as far out as you think.  I will say this, the world's debt problem via the paper money from nothing ponzi scheme, has gotten way worse, since they plugged it up a bit in 2008, and they're scrambling around plugging holes all over the world, papering it over, and busily creating outrageous economic hyperboles that have no basis in reality, but are still basically believed by the sheeple.  At some piont 'way worse' will become 'exponentially worse.' 

Also, all TPTB in the many developed nations that want to maintain the ponzi can't seem to agree on just how to do that, evidenced by Germany and others desire to repatriate gold, and the paper currency war that's flaring.  At some point in the not too distant future, one of the many plugs in the dam will break, causing many others to crack and break under the massive strain, and the rushing flood will be upon us.  Prepare.

anti-reifist's picture

"responsible students pay it back and forego consumption for decades in order to make their payment on a frozen or falling wage"

Including this kind of moral rhetoric in debt conversations does nothing but play into the hands of the banks and their government backers.  You might as well classify those students as 'gullible'; it's not any more or less accurate. 

AustriAnnie's picture

I can't decide whether I agree with you or not.

The way I see it, the moral aspect matters.  I can't decide where the line is.   And this is part of the problem.  Is it "responsible" to pay into a system that was forced upon me?  

Those of us who refuse to walk away from a debt and put a taxpayer on the line for it, end up paying for our debt as well as the debts of others who do walk away.  The alternative is to say fuck it and refuse to pay to support the system, and if someone else is dumb enough to pay then its their problem, I'll get mine.   Its hard to walk the line and neither be a net taker or a net giver.  You can't be self-sufficient because you have to live in the world as it is -- all you can do is choose between various paths within the same corrupt system.

Dingleberry's picture

I'll make it easy for you as I spent a ton of time talking to kids trying to get them from going into debt bondage. Here is the deal: you won't just be fighting the kids, you will be fighting their parents, too. Parents do not even know how to spell the word "no".

In their collective minds, tomorrow never comes. And certainly not with interest.

Whiner's picture

Statute will again be amended to make these funny money debts dischargeable. The more recent loans were never intended to be collected. Uncle Sam Obammy: "I...uh... Just put this on my tab. Thanks." "Oh I gotz not more credit? Datz yo problem now."

Yardstick of Civilization's picture

Just move to place where local law doesn't allow for wage garnishment (thank you, Texas). Of course, you can kiss tax refunds and any hope of social security goodbye. But hey, it's something . . . .

Lugnut's picture

Exactly, which is why I don't know why the powers that be worry about it, Sure the loans can be defaulted upon, but they can't be escaped from through bankruptcy. The money was created from nothing, and will be repayable to the grave.

Do a bundle wrap up and sell it as a AAA CDO. Guaranteed revenue stream bitchez. Until its not.

At least our generation confined itself to just getting upside down on their credit cards at school, buying booze raman noodles, and spring break trips.

NoDebt's picture

Where do you get that it's the banks doing these loans?  What little involvement they had in this process years back was eliminated completely a couple years ago.  It's all straight-from-the-government on this stuff now.

Don't worry, no actual bank will be harmed during the making of this tragedy.  Only taxpayers.  And, really, who gives a fuck about taxpayers at this point anyway?

youngman's picture

You said it...the TAXPAYERS will be harmed....the Producers...the TAKERS...will have no problem...just more welfare

NoDebt's picture

Exactly.  It'll just sit there as a big negative on the government balance sheet (or probably off-balance-sheet like Fannie and Freddy do now) and suck on the taxpayer's teat for who knows how long.

The real horror of this is that big government is the winner here.  In such a situation they can decide if they want to make it a benefit to you (welfare- writing it off or never pursuing collection) or your worst nightmare (aggressive collection, prosecution for "fraud", whether real or imagined, etc.)  Imagine if they did that on a case-by-case basis?

THEY OWN YOUR ASS.  You will do as government commands or suffer the consequences.  No escape possible.  Couple trillion of defaulted loans is a small price to pay for the control that accrues to the government.  And it's not even the government paying it.  Taxpayers do, of course.  But government gets all the control to use as the adminsitration and bureaucrats see fit.

If you're a big government fan that is the ultimate win-win.

New_Meat's picture

another step towards collapsing the "system"

stick it to the man!

anti-reifist's picture

Oh they're involved--they get plenty of profits from many types of loans.. when the system works.  Only the losses are socialized.

caShOnlY's picture

So do you recommend that the banks continue to lend money to those who have no chance to ever pay it back?

Q: did they ever stop? because if they did this country is down the shtter in a hurry.  It runs on EZ credit - we don't need money anymore, this is the new improved america.

The american dream is 10 credit cards and a new chevy.

Strider52's picture

My friend's brother just got another tranche of Student Loan. He got $6,000, bought a bicycle, tons of Oxycodone, bottles of alcohol, weed, etc. He is NEVER going to pay it back, and has no intention of ever doing so. Never did.

Cap Matifou's picture

The "not paying back" is encoded into the money system. It is a musical chairs game, where somebody will be not able to bring up the "money" plus interest.

As an early FED director has put it:
"Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is."


Larry Dallas's picture

This and those who show the prowess and discipline to become personal injury attorneys. That's about it in this fine land.

And burger flippers.

Everything else is finance based.

aerojet's picture

Don't forget car sales and leasing, motorcycles, and all kinds of other leisure products as well.  Video games! 

natty light's picture

You forgot overpaid coaches and staff.

Navymugsy's picture
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

? Albert Einstein

ToNYC's picture

We'll always have hooking! Who's not to like there?

Bicycle Repairman's picture

This is a game of chicken.  Students, your opthamalogist friend especially, think that .gov will blink.  And .gov will blink.

camaro68ss's picture

I said F*** collage, started working after high school, Im now 26, have a nice house, 20k in the bank and 700 ounces of that shiny silver stuff that only cost $5 to dig out of the ground.


I don’t have one friend that went to collage that has a house or is even close to where im at now in life. Hell, most of them don’t even have jobs yet or are flipping burgers.

jimmytorpedo's picture

And they probably can't spell college either.

camaro68ss's picture


haha, you got me there.

I should have spent 40k to learn how to spell better. haha

jimmytorpedo's picture

At least we can agree on what a nice car is/was.

ps reading is a good way to learn how to spell

save your money for the camaro!

camaro68ss's picture

lol, already have the camaro, remember i said F*** "collage" and started making money young. hahaha

Never was a good speller, nor was einstein, not saying im einstein.