Student Debt Accounts For Nearly Half Of US Government "Assets"

Tyler Durden's picture

On Friday we asked if the student debt bubble was about to witness its 2007 moment. In July of that year, all three ratings agencies turned aggressively negative on subprime-related MBS and their collective actions triggered a pre-crisis crisis in Canada where billions of asset-backed commercial paper stopped rolling in August, offering those who were inclined to take notice a window into what the financial would look like just one year later. Earlier this month, Moody’s put some $3 billion in student loan-backed ABS on review for downgrade citing a risk of default in some tranches. As a reminder, here’s the rationale:

The reviews for downgrade are a result of the increased risk that the tranches will not fully pay down by their respective final maturity dates. Failure to repay a note on the final maturity date represents an event of default under the trust documents. 

 

Voluntary prepayment rates in FFELP loan pools remain historically low as a result of sluggish economic growth and high unemployment rates among recent graduates. Although prepayments rose to 2%-3% of the loans in repayment in 2014, partly as a result of borrowers refinancing their FFELP loans through private student loans and Federal Direct consolidation loans, prepayments remain low relative to historical levels. Deferment and forbearance levels remain high throughout the life of the collateral pools.

The collateral backing the paper is FFELP student loans — that is, it’s guaranteed for 97% of principal by the US government. With nearly one in three loans in repayment delinquent by 30 days or more, and with $1.3 trillion in student debt outstanding, we’ve suggested the situation could deteriorate materially going forward and we’ve also noted that it won’t be long before this trillion-dollar mountain of liabilities ends up being socialized because as Bill Ackman says “there’s no way students are going to pay it back.” 

Having set the stage, we bring you the following three charts from Bloomberg which show the extent of the problem and the extent to which that problem will become a public, rather than a private issue.

More from Bloomberg:

Student debt now comprises 45 percent of federally owned financial assets. Of course, that doesn’t include assets owned by the Federal Reserve, and it doesn’t include real assets like land. Still, it’s a startling figure.

 

This trend worries me. Why? Because when the government owns student loans, it has every incentive not to fix the country’s student-debt problem.  

Consider the sheer size of the revenue that the government earns from student-loan interest payments. In 2013, it was $51 billion -- almost 2 percent of total federal revenue for that year. That’s more than two-thirds of the lifetime cost of the entire F-22 fighter jet program!

 

With that kind of money on the table, it’s going to be hard to get the government to take strong action for debt relief. A whole generation of millennials has been economically scarred by the financial crisis -- they borrowed to pay for school just like their older siblings did, but the capricious power of the business cycle left them with fewer jobs and lower wages even as they were saddled with record amounts of debt. It’s no wonder that delinquency rates on student loans havesoared.

 

One way to bring that unlucky generation some relief would be to permit student debt to be expunged in bankruptcy. Democrats in the Senate are trying to allow that. But with Republicans in control of both chambers of Congress, this probably won't happen.

 

Instead, what we’ve gotten is President Barack Obama’s “Student Aid Bill of Rights.” The list of “rights” emphasizes students’ right to go to college, to take out loans and to pay those loans back quickly and easily. In other words, it’s exactly what you’d expect from a government interested in maximizing the revenue it collects from indebted college graduates.

 

If you think this sounds unencouraging, you’re not alone.

 

So what would happen if the Senate Democrats’ plan were to become law? Well, a lot of young people would file for bankruptcy. The federal government would lose some of its revenue, but not so much that it would appreciably change the long-term ratio of debt to gross domestic product. The gap would be made up with future tax hikes and/or cuts in spending. Those future taxes would be paid by successful millennials and their descendants, letting unsuccessful millennials off the hook. So it would have a redistributive effect, part of which would go toward canceling out bad macroeconomic luck.

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i_call_you_my_base's picture

The ratings agencies have probably already gotten a stern warning about it.

doctor10's picture

No central banker anywhre will let that debt get discharged. Ever.

Should be against the law to use humans as collateral for debt

post turtle saver's picture

slavery is against the law... debt is the loophole

BrosephStiglitz's picture

I know you'll hate me for saying this, but debt can be useful (bring it on downvoters).  It can lead to a far more efficient economy.  It just shouldn't be on steroids like it currently is.  There is an inflection point somewhere between "useful levels of debt" and "economic doom machine".

The real issue with debt, is it needs true growth prospects to be sustainable (or I suppose you could think of this as a relatively high marginal product of debt).  I seriously doubt the US has seen something like that any time after the 1970s.  The ending of Bretton-Woods initiated the beginning of a government debt cycle which was entirely unbacked by collateral.  The accelerated financial deregulation in the 1980s seems to be the last vestiges of a (somewhat) virtuous financial system.

This crazy financialized world is going to end so badly.  So, so badly. 

nuubee's picture

There's a significant amount of semantics to be argued here. Personally, I view debt as wrong, but investment as good.

 

Unfortunately for us, they're two sides of the same coin. Debt is what people get into in order to live a certain way. Investment is what someone with excess wealth/assets gives out in the hopes that greater things will come. Consumers without a productive idea/industry should not be allowed to get into debt. Entrepreneurs should undoubtedly be allowed to receive assets from those wishing to invest in their production.

BrosephStiglitz's picture

Debt is useful to accelerate investment, and increase capital stock as well as aggregate technology levels.  It is, however, a proverbial sword of damocles, in the sense that it can also ruin an economy if it isn't very tightly monitored and constrained.

The single biggest debt mismanagement machine is the government right now.  They are blowing trillion dollar debt bubbles (way beyond the point of subprimedom) into multiple industries.  The subprime crisis was a walk in the park, wait until the student loan bubble contracts.

The reason why government is able to blow these bubbles is because they are not constrained by anything.  During Bretton-Woods they had real tangible restraints (gold reserves), since then they have had no restraints. This is an (accidental?  or maybe intentional?) Ponzi Scheme.

Government is dangerous in this phase of expansion because, unlike the private sector, which must transfer ownership of assets to more competent management, government can tax, inflate, seize wealth etc.  and they will. 

doctor10's picture

The "real issue" with debt is using humans as collateral. That is a human rights violation-especially when governments do it to "their' citizens.

Fun Facts's picture

"slavery is against the law... debt is the loophole"

“While boasting of our noble deeds were careful to conceal the ugly fact that by an iniquitous money system we have nationalized a system of oppression which, though more refined, is not less cruel than the old system of chattel slavery.”

— Horace Greeley Editor, New York Tribune - Member of the U.S. House of Representatives from New York's 6th district
In office December 4, 1848 – March 3, 1849

ThroxxOfVron's picture

"Should be against the law to use humans as collateral for debt "

Mortgages don't pay themselves.  

Oil does not pump itself out of the earth.  

Ore doesn't mine itself.  Iron does not smelt itself.  Steel does not form itself into beams.  Etc....

THERE IS ONLY ONE COLLATERAL IN THE WORLD: HUMAN PRODUCTIVITY.

The problem is not one of designation of the collateral; the probem is that the Governments are using debt-based fiat systems to rob the citizenry of their productivity via pyramided interest ponzis that are mathmatically unstable and ultimately have terminal saturaton points which onced reached result in total systemic failures.

The oppressive imposition of the extractive/destructive debt-based ponzi monetary/financial systems is the problem.

 

IF people want to borrow money privately the only constraint should be their personal productivity.

IF the system ceased to differentiate between those with access to newly genreated debt-fiats and financial engineering largess and  those who are restricted from access to newly generated debt-fiats and financial engineering largess the system would function in a somwhat more balanced manner.  

The land-shark capitalists are no more productive than ditch diggers ( maybe less ); but, due to their access to vast sums of newly and effortlessly generated ponzi-finance debt-fiats & to financial engineering largess via .GOV tax loopholes and corporate welfare and fraudulent accounting treatments of their debts as assets they aggregate vast real assets/wealth very rapidly -and to the detriment of the rest of the citienry.


Other forsaken/suspended but important feature sets of the debt-fiat system are the mechanisms for re-organizing and purging bad/un-payable debts. Were these mechanisms allowed to function the system would function much more smoothly and -in a moral relativistic sense- 'fairly'.

Bail-outs, subordination of one debt to another contrary to contract terms and governing contract laws, and the government/bureaucracy funding via debt ponzis stifle and damage the proper function of the debt-fiat system.  This is not merely highly irresponsible from a systemic and social stabilities perspective; but, effectively divides the populace into rigid classes of easily discernble as an Oligarchy of Rentiers, serivcers/praetorians/bureaucrats under the implicit control of the Oligarchy of Rentiers, and serfs.

The insolvent require declarations of bankruptcy, immediate orderly disgorgements of property associated with the failure and/or reorganization sans the failed management if there is anything left to the senior creditors.

Governments should not be gouging the citizenry by forced placed insurance and education schemes at exorbitiant usurous rates of interest vis-a-vis those it has engineered via the central banks on it's own unsustainable debts, and should not be funnelling profit streams to crony/fascist corporate pseudo-utilities...

Buckaroo Banzai's picture

I would argue that the 100 million+ income tax donkeys that the Feds have all over the globe are a collective financial asset that clearly dwarfs these student debt interest donkeys.

the great rift's picture
the great rift (not verified) i_call_you_my_base Apr 19, 2015 2:57 PM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

El Vaquero's picture

I want everybody to step back and look at how perverse our monetary/accounting systems are.  If you loan somebody FRNs, you get to put that loan down on your books as and asset.  If you transfer that loan to another entity, say, the government, then that other entity gets to list that loan as an asset.  Being owed FRNs is an asset.  However, if somebody deposits FRNs at a bank, it is a liability.  Having the cash is considered a liability and being owed the cash is an asset in today's world.

 

This is perverse. 

Chuck Knoblauch's picture

Slavery is a perverse institution.

El Vaquero's picture

And I get shocked looks when I say that I wouldn't mind if everybody maxed out their credit cards to purchase tangible goods, then defaulted en masse.  The entire monetary system is corrupt to its very core and it should be cheated.  Unless you are on top, it is cheating you. 

 

But people have been conditioned to pay their debts "because its the right thing to do" without ever considering just what consideration they have been getting for that debt. 

Skateboarder's picture

All debt is odious debt in this rotten world.

ThroxxOfVron's picture

"All debt is odious debt in this rotten world. "

This is pretty much true.

There is NO reason to run a debt-based fiat system other than to extract wealth from the vig.

When a loan is originated the principal is conjured out of thin air, and the interest is not.

The interest payments can only be made via a negative sum transfer of human productivity to the loan originator that is vast in contrast to the ease of generating the loan.

spinone's picture

Intergenerational debt is taxation without representation

A Nanny Moose's picture

The future are the best Tax Livestock of all. They cannot complain, and cannot vote themselves out of their predicament. By the time they can complain/vote, those who enslaved them are dead and/or long gone from public life.

An interesting case study in risk/reward imbalances in public orifice.

ThroxxOfVron's picture

"Intergenerational debt is taxation without representation "

I fully agree.

IMHO, the sale of US treasury debt that is not liquidated/paid off without rolling new debt is effectively the sale of children into slavery.

Chuck Knoblauch's picture

By all means if you can evade prosecution.

Consider the creation of a corporation using a stolen identity.

El Vaquero's picture

It wouldn't be criminal prosecution.  But what I'm talking about would require millions to do it at the same time.  A mass protest, so to speak.  Alas, that would require that people understand that they are being scammed, which isn't going to happen. 

Handful of Dust's picture

There are  more people then you think who max out their cards for hard assets (like gold coins or a house in Florida) and then default and move to a Debtor paradise state like Florida where your house and some of your property are protected from creditors and repossession and most judgment liens.

 

I used to read about it all the time during the last Bust in the 1980's and have heard it's quite common again this last decade, but trickier this time around since cc companies are a tad wiser to their scam.

 

My dad bought a house from an Oil Man back then who had gone bankrupt. I remember men comin gto our door looking for the previous owner wanting to break his legs. Scamming can be a dangerous business.

El Vaquero's picture

That's why it would have to be many millions of people who do it.  The banks' power goes away if people stop playing the game with their corrupt scrip.  As it stands now, more than enough people play the game, and it generally forces people who want to opt out into the system. 

Karl-Hungus's picture

I like the idea, but it's a hell of a lot easier to fool someone then it is to convince them they have been fooled.

Chuck Knoblauch's picture

I saw it on television and YouTube, so it has already been done, but not on a mass scale.

100 lone wolves acting independently to achieve a common end.

Rather than 100 members of any one group acting in concert to achieve a similar objective.

Use your lack of resources to optimal utility.

Scatter the resources of your pursuer.

Damn, the Chinese make excellent strategists when they aren't thinking like communists.

 

Weaponized Innocense's picture
Weaponized Innocense (not verified) El Vaquero Apr 19, 2015 12:12 PM

And speaking of perverse logic in Kiki's evil voodoo dollhouse if pretend since that is the only way to be fair in the most unfair of ways for her bullheadedness to be everything to everyone as for everyone to have nothing but her torture.....
It ain't so perverse to the innocent is it? When the devilish details between the words of free is gonna cost u everything for the bullshit of ur heart held on yoyo strings by those robbing ur back pockets is better than one living a better life!

chunga's picture

It is totally fucked up.

If you loan somebody FRNs, you get to put that loan down on your books as and asset.

From there it takes on another innovative life that I think is called rehypothecation. That "asset" can then be "sold" multiple times all stemming from a loan that never gets paid back.  Now that fraud is a commodity hidden in plain sight, loans that don't get paid back are worth more than loans that do.

That's what they call "synergy" these days. Since people won't be making as much money as they used to, it has to be given to them in a form of a loan. It's not only a creative way of stealing from the future, it also at the same time steals money from people who don't even have it yet.

For the older people that like to bash the millenials...remember this ...they'll also be getting the bill for your unfunded liabilities.

El Vaquero's picture

"Synergy," I fucking hate that fucking word.  I know, it's irrational to hate a word, but it is so often used in a meaningless nothing-burger way to justify corruption.  I would say that your point should be hammered on, but too few people would understand that shadow banking is just taking the idea of a loan being an asset to the extreme for it to make a difference. 

 

As for the mellinials, I doubt that most of them will make the connection that it is the past generations who spent their futures away.  Most people don't ever stop to consider why FRNs are "valuable," but they sure as hell will seek them out.  Of course, if getting your paycheck involves not understanding why, in an honest world, your paycheck should not have any value, you're not going to understand that your paycheck should be worthless.

 

I also don't think that the older generations realized exactly what they were being duped into.  Go dig up the picture of a protester holding a sign that said something along the lines of "Keep The Government's Hands Off Of My Medicare!" to see what I mean.

chunga's picture

That word was used to describe how great the Kraft/Heinz merger is going to be. I think it means that a lot of the people that work there are going to find their cheese is about to get moved.

I don't like the generational wars but it seems there is more vitriol aimed at the younger generation, who I think as a group has long since given up on politics and gov as fraudulent and utterly corrupt.  The millenials don't vote but the boomers do. ANd I'd go further in that the millenials didn't have much say in the BK laws getting changed to specifically target this bubble/pop. If BK laws get changed back it won't be because it's unfair or one generation complains.

It will be because the financialization cronies (dimon, greenspan, bernake, etc) want to get moar rich on loans they and their friends made out of thin air that didn't get paid back by bailouts and other sneaky tricks. Everything tangible of value got stolen a long time ago, so the only thing left to steal is debt. Just like the housing...prices went through the roof before it popped. Education cost has soared and milleniums can't afford houses with crappy jobs so they'll get nailed with this.

Yeah I know nobody put a gun to their heads...I still think it's pure evil...and was planned out a long time ago.

*I'm a gen-xer with millenial kids with zero school debt.

El Vaquero's picture

In a way, a gun was figuratively put to their heads.  There are few decent jobs for a basic HS graduate to get, so they were all sold a load of BS telling them that they needed college to get by, and they had a choice between taking on student debt or slaving away as waiters/waitresses.  What else were they to do?  The public education system failed most of them and they didn't come out of HS with the requisite critical thinking skills to say "You know what?  This is bullshit!"  To make it worse, we've sold them the college degree is as good as gold meme for so long that a lot of kids don't realize that, for it to be useful, you actually need to learn useful knowledge.  A lot of them are there for a magic job granting little piece of paper called a diploma, not for knowledge.  Now, they're in debt and there still are very few good jobs for them. Now, they owe the government, and that is one creditor who you do not want on your ass. 

 

A few of them are going to be jolted into figuring that critical thinking thingy on their own because of this.

 

As for the intergenerational warfare, maybe that's dependent on region.  I just don't see it here, but where you are, it may very well be different.  Of course, a lot of people here view familial relationships a bit different than in the rest of the country, so that could have something to do with it. 

TalkToLind's picture

And owning precious metals is downright criminal.

de3de8's picture

And or cut spending.........that's a good one!

de3de8's picture

And or cut spending.........that's a good one!

all-priced-in's picture

Welcome to double entry accounting -

 

When you loan someone FRNs (cash) you make two entries on your balance sheet not one.

You also reduce cash on your balance sheet for the loan you made.

So the debtor adds the cash balance as an asset - books the loan as a liability.

The creditor subtracts cash and books the loan as an asset.

 

When you put FRNs in the bank - same type thing - the bank

 

Books the cash as an increase to their assets - and books the liability because they owe the person that made the deposit this amount.

 

You are only looking at 1/2 of each transaction.

 

 

 

Stackers's picture

Surprised no one really talks about WHY those charts exploded in 2009.

Student Aid and Fiscal Responsibility Act  (you really have to love the names they come up with)

http://en.wikipedia.org/wiki/Student_Aid_and_Fiscal_Responsibility_Act

This ended all Federal garauntees of private student loans, effectively killing private student financing

This same act vastly expanded the Direct Loan Program

http://en.wikipedia.org/wiki/Federal_Direct_Student_Loan_Program

 

Weaponized Innocense's picture
Weaponized Innocense (not verified) Stackers Apr 19, 2015 12:07 PM

This article here in the field of erasures past the yellow bricks of gold road before witch Hillary's castle of delete buttons is the mommy dearest and daddy big dicks Münchausen syndrome solution in Kiki's evil voodoo dollhouse!

post turtle saver's picture

fiscal responsibiliyt act... fiscally irresponsible

affordable care act... health care less affordable than ever

the list goes on and on... just flip in the words with opposite meaning and the true intent is revealed

Chuck Knoblauch's picture

Tell the IRS to halt cash payments to foreign rulers and monarchs.

Invest US cash in US businesses.

Create American jobs.

max2205's picture

Some one I know died with an upside down reverse mortgage 

100% guaranteed by the feds 

The bank got their money back 

But the estate got 1099'd by the bank.

 

How fucked up is that!

post turtle saver's picture

I would have burned it to the ground and salted the earth it stood on... fuck those guys

Chuck Knoblauch's picture

I hope the family gutted the copper plumbing and marble.

The UN only cares about the real estate.

Perhaps irradiating the land is a solution to UN encroachment?

Contaminate the land with Mercury, Radon, and Uranium.

Scorch and burn.

glenlloyd's picture

I think they underestimate the number of people who would take advantage of the discharge of student loan debt. In typical fashion the more you subsidize something the more you get of it, we will have record numbers of students filing bankruptcy if they move to allow for it. And further, it creates a model for what people will do in the future, borrow, go to school and then just plan on a default at the end of it all. Hell why not just default during your last year and get it out of the way?

And then there are the ones who paid their loans back, how can you justify the inequity that results when some get to discharge and others not? Why again are they picking winners and losers?

This is a recipe for disaster which should shock no one, it's the same result over and over. Get the .gov involved and it all turns to shit in short order. There's no way we didn't know this would happen when .gov took over the student loan market when the depression started in 07.

Chuck Knoblauch's picture

You're subsidizing a ruling class currently.

And you don't want to see it.

You're insane.

sessinpo's picture

Why subsidize anyone? Oh, I know, that would be unfair to the poor who don't have the cash of the ruling class.

So instead we put the poor into debt and make them more poor? And I do hope you realize that part of that ruling class is the academic elite that gets all that government money.

How about the way the things were? You earned your way and paid your way. If you couldn't afford it, then you took another career path. Cut the government money to universities and make them actually compete and earn the income.

And please don't tell me a college education is a right just like Obama Care!

 

Chuck Knoblauch's picture

I think it's too late to even debate anymore.

America is a colony again.

We export raw materials, and import finished goods.

And most farmland is owned by big Agro.

Young people don't have many options today.

Join the military and die in a huge false flag?

The Chinese need breathing spaces in North America.

The next 5,000 years belongs to them, I suppose.

Handful of Dust's picture

<< I think they underestimate the number of people who would take advantage of the discharge of student loan debt.>>

 

free shit = infinite demand

 

That's what my Econ 101 Prof used to say. Then he would draw one of those econ charts with curves and lines to illustrate for those students who were 'learning impaired' ... like me.