Starting Today Interest On New Student Loans Rises By 20%

Tyler Durden's picture




 

While the new quarter has started with a bang for the capital markets and those 1% who actually benefit from one after another record high courtesy of the Fed's "fairy dust", July 1 is an important date for another group of Americans: students. However, instead of more wealth, America's aspiring intelligentsia has something far less pleasant to look forward to, namely more debt, because today is when higher interest rates for education loans kick in. Starting July 1 all new loans for the 2013/2014 student year will increase from 3.86% to 4.66%, a 20% increase.

As a reminder, while the rate on student loans was lowered to 3.4% during the financial crisis, last summer this reduction expired which would have caused the rates to double to 6.8% had it not been for a last minute deal linking loan rates to US Treasurys, which luckily for students, are at historic lows for now.

Yet while the 80 bps increase per annum may seem like a lot when starting from a sub-4% base, according to Bloomberg calculations "the average monthly payment would go up about $10 a month—an amount that won’t make or break many borrowers. Over 10 years, the increase could add about $1,350 in interest expenses."

This math is based on the assumption that the average graduate with debt, which would be 7 out of every 10, had on average some $29,400 in loans. Of course, since the rate hike affects future debt incurrence, that calculation is wrong. As for the trend, it is not a US student's friend:

The national share of seniors graduating with loans rose in recent years, from 68 percent in 2008 to 71 percent in 2012, while their debt at graduation increased by an average of six percent per year. Even though the financial crisis caused a substantial decline in private education lending while these borrowers were in school, about one-fifth (20%) of their debt is comprised of private loans, which are typically more costly and provide fewer consumer protections and repayment options than safer federal loans.

In other words, a far greater issue for students is not the interest on the debt, but the debt itself, which in a time of ZIRP has become equivalent to money (it isn't) and students have had little reluctance to borrow every possible loan they could find resulting in a student loan bubble of epic, $1.1+ trillion proportions. Will today's rate hike - modest as it may be - be the pin that pops it?

As for the rate hike, Bloomberg has some soothing words:

In recent years, the increased income graduates earn has generally kept up with rising student loan payments. Borrowers whose monthly loan expenses are out of whack with what they earn also have additional back-up repayment options. Whether the overall affordability will hold up depends on a number things, including how much and how quickly rates rise. Congress’s cap on undergrad student loans stands at 8.25 percent. Given the average debt in the example above, rates at that level would add about $65 a month in payments—almost $14,000 over a loan’s duration.

Of course, this too is based on a flawed assumption: that college graduates can find work. Unfortunately, as the following chart showing the labor participation rate of Americans aged 20-24, or those graduating from college, the labor force is increasingly more devoid of recent college grads. The result: an overabundance of those who "earn" zero income. It is here that even the smallest increase in rates will be felt most as there is no income to offset any interest payments with, let alone increasing interest.

 

Finally, and as we have shown repeatedly before, those students who are angry that they are saddled with tens of thousands in debt and nobody is willing to hire them, perhaps they can take it up with their parents: that particular age pool (55 and over) has practically never had it better when it comes to work opportunities also known as "retirement as a Wal-Mart greeter."

 

Finally, those curious what the average student debt breakdown is by state as well as the proportion of students with loans in the most recently reported Class of 2012, here is the full data:

4.666665
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Tue, 07/01/2014 - 17:39 | 4915285 Skateboarder
Skateboarder's picture

80K of undergraduate collegiate debt is a birthright, damnit.

Tue, 07/01/2014 - 17:43 | 4915298 Greenskeeper_Carl
Greenskeeper_Carl's picture

Good. Raise it to 50% if that's what it takes to make young people realize how stupid this is. But, it'll all get written off eventually, so this is pretty meaningless. There is no stopping this bubble from bursting, and it won't be pretty.

Tue, 07/01/2014 - 17:44 | 4915312 fonzannoon
fonzannoon's picture

agreed, 20% is peanuts. double it a few times and tack on some extra fees on the principal. break the fucker already.

Tue, 07/01/2014 - 17:50 | 4915331 NotApplicable
NotApplicable's picture

Mine is at 10%. Maybe if I hit the lotto, I'll pay it off before I die.

Tue, 07/01/2014 - 17:53 | 4915338 NoDebt
NoDebt's picture

I keep asking my Dad when he's going to pay off my student loan.  I'm like, "Dad, you're never going to be free until you get out from under all that debt."  Smart guy like him you would think he would have figured that out on his own by now.  I dunno.  I don't think he sees how important this is to do for himself.

Tue, 07/01/2014 - 18:24 | 4915442 Pladizow
Pladizow's picture

Serfs Up!

Tue, 07/01/2014 - 18:32 | 4915466 Never One Roach
Never One Roach's picture

5%...20%...40%...100%......................doesn't matter when your not going to pay it back anyway.

Tue, 07/01/2014 - 19:05 | 4915490 RaceToTheBottom
RaceToTheBottom's picture

Wait, those were loans?  I thought they were gifts?

Tue, 07/01/2014 - 19:12 | 4915610 Wait What
Wait What's picture

I'm still kinda confused abt what kind of college graduate it takes to a) rack up 30k in loans as an undergrad (lazy, not working, profligate spender) and b) lack the skills to pay off 30k in loans in say, 4-5 years.

really, figure 65% of 30-35k income (i'm low-balling here) goes to expenses, leaving in the neighborhood of 10k in disposable income. at 3-4% interest on the loans, the interest is a negligible addition to the principal. pay 6k off a year and easy peazy you're out of debt in 5 years.

sure, it means you've got to tighten your belt and do without an iphone til you're in your mid-to-late 20s, but then you're home free... or i should say, free to buy into the marriage-housing-family ponzi that is the spelled out trajectory after college.

the irony is that i've made this argument to peers before, and all I hear are crickets. few are willing to sacrifice the 'keeping-up-with-the-kardashians' luxuries that make them feel on par with zero-debt-all-net-worth guys like me.

debt is as much a cultural disease as envy.

Tue, 07/01/2014 - 18:38 | 4915484 foodstampbarry
foodstampbarry's picture

Bitchez!

Tue, 07/01/2014 - 17:47 | 4915318 libertus
libertus's picture

The current system is stupid. Lets build something very different. Oplerno.com is an open learning organzation with over 150 faculty and growing everyday. They need more classes and are developing degree programs. Check out the business model that is not dependent of student loans. It is a disruptor and will change things. 

Fall is only two months away. Things are going to be really different when the students get back. The only people that can afford this nonsense are waking up.

Skills are what count and not just degrees. You can get the skills for a lot less at places like Oplerno. 

Tue, 07/01/2014 - 18:29 | 4915456 john39
john39's picture

if it really makes a positive difference, expect it to be outlawed in the near future.  debt and misery are the goal, not a side effect, on planet usury.

Tue, 07/01/2014 - 19:32 | 4915710 Wait What
Wait What's picture

found oplerno abt a year ago and discovered avenues of research that i would never be able to access in standard academic programs. great model for the future, can't stress that enough. enough of the bullshit, forcing kids to learn 'american cultures' instead of practical skills.

then again... it will be an apocalyptic revelation for people to realize that the primary-secondary-university program puts you in a life trajectory. most ppl aren't built to question authority, so they accept the ideological underpinnings that come tied with the knowledge about the real world they acquire during the education process.

Tue, 07/01/2014 - 18:48 | 4915515 NoPension
NoPension's picture

Oh no. The math is wrong. Here in Maryland, that would be a 8 tenths of one percent increase. And our Governor wouldn't lie!

See, they raised our sales tax from 5% to 6% and sold that as a one percent increase! And these stupid fuckers keep voting the same crowd.

Half of Maryland is on the dole, the other half works for fed or state .gov, and the third half ( slightly smaller ) gets stuck paying the bills.

Tue, 07/01/2014 - 19:24 | 4915680 DirkDiggler11
DirkDiggler11's picture

Fucking Move.

Md is now a multi-cultural shit hole, just like DC.

Tue, 07/01/2014 - 19:27 | 4915687 max2205
max2205's picture

Your math is govt math

How do you get 3 halfs...lol

Tue, 07/01/2014 - 17:44 | 4915313 StacksOnStacks
StacksOnStacks's picture

Just looking at those names made me sick.  Been there, borrowed that, was told iI'd be better off.  Everytime I say I'd be better off without it I get looked at like I just swallowed a bag of dicks whole!

Tue, 07/01/2014 - 17:49 | 4915327 NoDebt
NoDebt's picture

"Everyone has a 3rd mortgage on their house these days, Ray."

"Yeah, but at 19%?  You didn't even bargain withe the guy."

"You're never going to regret this, Ray,"

Tue, 07/01/2014 - 17:57 | 4915350 Skateboarder
Skateboarder's picture

In skateboarding, a 'credit card' is when you mess up a trick and the board reams you in the asscrack or the nutsack.

Tue, 07/01/2014 - 18:10 | 4915383 Da Yooper
Da Yooper's picture

Can you spell indentured servitude boys & girls

 

LMAO

 

I know most of ya cant or ya wouldnt be signing your life away to the bankers

 

Also higher education is a workfare program for liberal teachers would cant do anything productive

Wed, 07/02/2014 - 01:09 | 4916767 WTFUD
WTFUD's picture

Da Yooper is that when you get anal hair caught between the gaps in your teeth?

Tue, 07/01/2014 - 18:22 | 4915436 Stoploss
Stoploss's picture

Somethings wrong with the loan by state table, we can still read it..... Why not select white letters?

Tue, 07/01/2014 - 17:40 | 4915287 Zirpedge
Zirpedge's picture

 Still the best investment a young person can make in therir future.

Tue, 07/01/2014 - 17:41 | 4915291 Citxmech
Citxmech's picture

or not.

Tue, 07/01/2014 - 17:43 | 4915301 fonzannoon
fonzannoon's picture

it wil be an even better investment in 10 years when you can complete it online at amazon.com university for 5k a year. Right now it is more of a giant piece of shit than an investment.

Tue, 07/01/2014 - 17:51 | 4915332 NoDebt
NoDebt's picture

Testify, brother!

Wanna hear about one of my friends who never went to college, copied my resume, put his name at the top and got a better job than me?

Tue, 07/01/2014 - 17:58 | 4915352 Zirpedge
Zirpedge's picture

You could have all the charm and charisma of a dish towel.

Tue, 07/01/2014 - 17:59 | 4915358 NoDebt
NoDebt's picture

You ain't doin' half bad yourself, friend.

Tue, 07/01/2014 - 17:59 | 4915359 fonzannoon
fonzannoon's picture

feel free to borrow this bag on my head.I am sure there are some extra's around here somewhere.

Tue, 07/01/2014 - 18:16 | 4915417 Zirpedge
Zirpedge's picture

I think my avie should be the default avie around here. We need to embrace the radical fringe right, anyone here done with their copy of the Anarchist Cookbook? I have bit coins to trade.

Tue, 07/01/2014 - 21:26 | 4916107 Ness.
Ness.'s picture

I assumed your avie was a selfie, no?

Tue, 07/01/2014 - 17:56 | 4915348 Zirpedge
Zirpedge's picture

I agree, the internet is a good source of information. College is really all about networking and selecting the right fraternity. Being cooped up in momma's basement taking correspondence courses at The University of Phoenix is going to limit ones horizons.   

Tue, 07/01/2014 - 18:55 | 4915539 NoPension
NoPension's picture

No. College is about football, basketball ,beer and freaky sex.
I'm 52, never went.
I'm ready now.
My wife will co-sign the loan.

Tue, 07/01/2014 - 18:57 | 4915549 NoPension
NoPension's picture

And by the way. I'll put my 1980 Catholic High Diploma up against a 4 year degree from any of these mills.

Tue, 07/01/2014 - 20:41 | 4915927 Variance Doc
Variance Doc's picture

All right, let's go.

My dissertation (from an Ivy league, BTW) was in probalistic solutions to non-linear stochastic differential equations.

Now, take a subordinated Levy process on an American put option for DB. What is the fair price today for said option, with an expriation in 6 months.

Note you have to correctly incorporate all of the stylized features observed in the market, such as skew, smiles, etc.

Use a quadratic term structure for the subordiation process.

Tue, 07/01/2014 - 21:28 | 4916121 Ness.
Ness.'s picture

Did you get the job?

Tue, 07/01/2014 - 21:43 | 4916152 Variance Doc
Variance Doc's picture

Hill: So I ask you, when someone goes into that chapel and they fall on their knees and they pray to God that their wife doesn't miscarry, or that their daughter doesn't bleed to death, or that their mother doesn't suffer acute neural trauma from postoperative shock, who do you think they're praying to? Now, you go ahead and read your Bible, Dennis, and you go to your church and with any luck you might win the annual raffle. But if you're looking for God, he was in operating room number two on November 17th, and he doesn't like to be second guessed.

Hill: You ask me if I have a God complex? Let me tell you something: I AM GOD.

With appolgies to Lord Blankfein.

https://www.youtube.com/watch?v=LqeC3BPYTmE

Wed, 07/02/2014 - 01:19 | 4916782 WTFUD
WTFUD's picture

Fonz I wouldn't work for Amazon for 5k a year (sarc) but hey who knows most of us might be happy to work for food alone in 10 years the way things are panning out.
Jump down, turnaround, pick a bale of cotton. . . .

Tue, 07/01/2014 - 17:42 | 4915293 NOTaREALmerican
NOTaREALmerican's picture

Nobody forced you hippies to get loans.   Why don't you get part time job instead of bitching about the greatest country in the entire goddamn world ?   

And get a goddamn haircut!  

Tue, 07/01/2014 - 17:44 | 4915309 FieldingMellish
FieldingMellish's picture

That's what my son did. Job AND a haircut. Starting yr 3 self funding with zero debt. It can be done but only if there is a will to do it.

Tue, 07/01/2014 - 18:13 | 4915407 Jerk_Store
Jerk_Store's picture

Nobody forced you hippies to get loans.   Why don't you get part time job instead of bitching about the greatest country in the entire goddamn world ?   

And get a goddamn haircut!  

 

And learn the lyrics to "my country tis of thee" while your at it ...damn hippies

Tue, 07/01/2014 - 17:43 | 4915304 alien-IQ
alien-IQ's picture

This should boost the market way past 17k tomorrow.

If only we could get WW3 going we'll hit DOW 20k by September.

Tue, 07/01/2014 - 17:57 | 4915321 Bear
Bear's picture

Not to worry ... Right before the Nov elections, Obama will declare a student debt jubilee and dare the Repubs to negate it.

Tue, 07/01/2014 - 17:49 | 4915325 pelican
pelican's picture

Yes. We don't want scientists, engineers, and people who can read anyway.

Most countries educate their students then US imports them!

Win win win Wall Street.

Tue, 07/01/2014 - 17:51 | 4915333 NOZZLE
NOZZLE's picture

I got in a fight with my cousin over this issue, he has three college age kids.   He is "in support of Sen (D-Fake Indian) Warren's argument that if Chase gets ZIRP Cash so should the kiddies to pursue their beer bong parties."  Just pretend that the cost of tuition and housing has not risen faster than the cost of a three bedroom two ensuite bath 1,400SF in Palo Alto.

Tue, 07/01/2014 - 18:00 | 4915362 Duc888
Duc888's picture

 

 

"However, instead of more wealth, America's aspiring intelligentsia....."

Fuck 'em, they voted for this piece of shit.  They consented to the assrape.

Hey Millenials, how's your asshole feelin' now.

HAHAHAHAHAHAAHAHAHAHAHA

Tue, 07/01/2014 - 18:15 | 4915414 Chuck Knoblauch
Chuck Knoblauch's picture

Go Brazil in The World Cup.

Tue, 07/01/2014 - 18:02 | 4915368 Duc888
Duc888's picture

 

Zirpedge: Still the best investment a young person can make in therir future.

 

Why yes, lifelong indebtedness and servitude is always the best "investment" in your future.

 

Pull my finger mofo.

Tue, 07/01/2014 - 18:03 | 4915371 Duc888
Duc888's picture

Skateboarder:80K of undergraduate collegiate debt is a birthright, damnit.

 

Yup, get that bib on so as not to spill a drop of the Gov throat yogurt.

 

LOL

Tue, 07/01/2014 - 18:06 | 4915379 FieldingMellish
FieldingMellish's picture

To add insult to injury, I suggest parents visit the campus a week AFTER the kids start in September. All of a sudden, there are banks handing out beer bongs with each credit card application. Not enough for some to get them to sign student loans, they want them knee deep in CC debt too.

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