Bernanke Just Assured That The Student Loan Bubble Will Be The Next "Financial Stability Issue"

Tyler Durden's picture

"At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained" - Ben Bernanke, March 28, 2007

"I don’t think student loans are a financial stability issue to the same extent that, say, mortgage debt was in the last crisis because most of it is held not by financial institutions but by the federal government" - Ben Bernanke, August 7, 2012


Please mark your calendars accordingly as yesterday the Chairman just guaranteed that student loans will be cause for the next "financial stability issue."

Here are the facts, courtesy of a just released expose on the WSJ:

  • Rising college costs and a sagging economy are taking the biggest toll on a surprising group: upper-middle-income families.
  • According to a Wall Street Journal analysis of recently released Federal Reserve data, households with annual incomes of $94,535 to $205,335 saw the biggest jump in the percentage with student-loan debt from 2007 to 2010, the latest figures available. That group also saw a sharp climb in the amount of debt owed on average.
  • Ms. Hofmeister, an insurance broker and financial planner, says she and her husband, an operations manager, combined earn a six-figure income that puts them in the upper-middle class and were surprised by the amount they will have to borrow. She says she feels trapped in financial purgatory, between "people with lower incomes who have a lot of subsidy, and the truly affluent, for whom this isn't a problem."
  • The Journal's analysis defined upper-middle-income households as those with annual incomes between the 80th and 95th percentiles of all households nationwide. Among this group, 25.6% had student-loan debt in 2010, up from 19.5% in 2007. For all households, the portion with student loan debt rose to 19.1% in 2010 from 15.2% in 2007.
  • The amount borrowed by upper-middle-income families, meanwhile, has soared. They owed an average of $32,869 in college loans in 2010, up from $26,639 in 2007, after adjusting for inflation, according to the Journal's analysis.
  • The typical low-income family receives grants and scholarships totaling 36% of the cost, the lender says, while for higher-income families such packages total 21%.
  • More than three million households now owe at least $50,000 in student loans, up from about 794,000 in 2001 and fewer than 300,000 in 1989, after adjusting for inflation.
  • Some families are turning to loans because they spent heavily or used extra cash to save for retirement. More than one-third of parents with incomes of $95,000 to $125,000 with a child who entered college in 2011 didn't save or invest for that child's education, according to a survey by education consultants Human Capital Research.
  • With their finances strained, some higher-earning parents are making their children pick up more of the tab. Among families earning $100,000 or more, students paid 23% of their college costs in 2012 through loans, income and savings, according to Sallie Mae, up from 14% in 2009; the share covered by parents fell to 52% from 61%.

And last but not least, those ever-altruistic baby boomers:

"The boomers are the first generation shifting the cost of college to their kids," both through increased student borrowing and reduced taxpayer support for higher education, says Susan Dynarski, a professor of education and public policy at the University of Michigan.

Because leaving them with $16 trillion in public debt is not enough.

* * *

Here is the issue in a nutshell: college tuition, just like government spending, is off the charts. Both are so high, that on an unlevered basis, the payback rate is N/M. Note the use of the world "unlevered" as it is one which will never occur, before the next systemic reset, when talking about anything involving the government. And what leverage does is mask true supply and demand. If college tuition was representative of real supply and demand, prices would be tumbling on average. Instead the easy access to student debt makes college seem quite affordable at any price point and thus there is no pressure to lower the equilibrium price. Which explains this chart, where the government-funded student debt surge is merely there to fill the needs of all those kids going to college, all of whom will never be able to pay it off especially as America increasingly transitions to a part-time worker society.

But at least they too, like their parents and grandparents, are indentured debt servants, just like the government wants.

And to the perpetually wrong Bernanke, the thinking is that if more people are on the same wavelength as the US Treasury, i.e., so deeply in debt that everyone will be begging for a dollar devaluation and/or debt hyperinflation, then the Fed will be not only able, but encouraged to debase the US currency at will.

Sadly, Bernanke is and always has been wrong, and when the student loan bubble does pop, and it will, the cost will once again fall squarely on the shoulders of that one nearly extinct species: America's middle class, which not only generates positive cash flow, but, gasp, saves a little money here and there.

Make no mistake: they are squarely in Bernanke's bulls eye, and are slated for extermination at all costs. In a world in which everyone is broke and defecting from every game theory equilibrium possible, those who still play by the rules are the system's mortal enemies.

In the meantime, we can't wait for Obama's next brilliant contraption: cash for flunkers.

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vmromk's picture

This motherfucking piece of shit Bernanke needs to be put out of his misery, before every single one of us is put out of ours.

old naughty's picture

" this juncture..."

Really, he realizes what is happening now?

Surly Bear's picture

Short of action by Congress, exactly how is the debt going to pop because, as most know, the debt cannot be discharged in bankruptcy court. If people are still getting collection calls for Hollywood Video bills that they may or may not owe, what the fuck do you think the government is going to do? Forgive the debt? Unlikely. 

LMAOLORI's picture



You make an excellent point Surly Bear they are garnishing social security for student loans right now and according to the WSJ the Republican's won't back a bankruptcy bill for student loans because of the debt thought obama does want that changed (VOTES and rather then going after the banker's of course his plan will then affect only investors (pension funds, etc). 


Federal Government Goes After Social Security Checks to Pay Student Loans


Obama Administration Backs Bankruptcy Option for Some Student Debt



CharlieSDT's picture

Sarah Lawrence College costs $59,170 per year.


What the fuck? Sarah Lawrence College? $59,170? What for? I don’t hear much about alumni from Sarah Lawrence College going on to make a bunch of money as CEO of GE or some other criminal organization like Goldman Sachs. No, Sarah Lawrence is just another one of many of America’s snooty overpriced liberal arts colleges mainly composed of girls (73% of the school is female) who think they’re sensitive and gifted and special and smart and major in Women’s Studies, Victorian Literature, Environmental Policy or some other equally useless bullshit.

Popo's picture

Make no mistake:  Geithner and Bernanke plan on forgiving student loan debt.  They have (perhaps correctly) determined that the public is actually willing to swallow debt forgiveness for students -- but not home owners.    The reason he isn't worried about student debt is that in his mind the solution is already baked in.   Of course -- this will lead to even higher education costs down the road.  But the Fed has never had a long term horizon for "solutions".   Forgiving student debt will buy them 10 years.  That's all he cares about.  

SheepRevolution's picture

Banksters forgiving debt? Earth calling to Popo...

HungrySeagull's picture

Then we have truly crossed over into the realm of beyond the event horizon.

First off I will open with both barrels and say:


"Who the fuck do you think you are you babbling imbecile?"

Second off.

I/we carry some debt and I think we are fortunate to have had a bank take care of the debt instead of Uncle Sam for once. The damn debt will still be around when we both get old enough for Social secuity. The silver lining (LIterally) is that it will be paid off by then.

I still have a house we can use to sell and make all of this go away. We will become debt free and thus useless to a Government intent on enslaving with Debt. (They have already done so very much at the levels I found truly disgusting; bordering on Generational Theft and Plunder unknown previously in History.)

Yesterday must be marked as the day Ben opened his big mouth and showed the Nation the true ignorance of the shadow cast far and wide by this Debt that cannot be dischaged by anything short of death.

This bubble will BREAK when Universities are exposed for the profit centers they are and Mills designed to enroll and enslave students. I was watching several students of different kinds walk down past the libary. They are so in debt just to be there (Something like 10K a year now) for a education they will find useless as ten thousand students have taken this and found that employers don't need or want that crappy degree)


I don't know why we bitch and groan so hard about this college experience when our very educational system from the Public Schools all the way up has shown themselves to be useless, brain washing and turning students into compliant lumps of programmed beings that need input.


I am number 5, I need input.


We are well and truly fucked, shanghai'ed into a ship going god knows where.


EnslavethechildrenforBen's picture

It's either going to be Slavery, or it's going to be Revolution. One or the other will come to pass.  We all need to come together and decide how this thing is going to go down. As for me, it's give me Revolution or give me Death. I will gladly die before I let some Banker type enslave me. 

sessinpo's picture

"they are garnishing social security for student loans right now"


The only problem with this logic is that SS is essentially broke, putting out more money then it receives.

MeelionDollerBogus's picture

Debt that can't be paid can't keep growing. The supply dries up so all choice is removed - you just can't squeeze that stone into a negative-volume space hoping a few more drops will come out. There's no blood left for the vampires and they need a torrent, not a puddle or a few drops.

Born-Again Bankster's picture

Only a matter of time before they introduce ticker symbol, MBA...the 3x inverse ETF on student loan bundles...Put options anyone?  Giggity. 

vast-dom's picture

the slope is fucking steep - makes subprime look a hell of a lot safer.

Mareka's picture

Senators Corker & Hagan are apparently still trying to sneak through the Covered Bond Act, S1835 that would allow rolling student loans, auto loans & credit card debt, among other things, into marketable securities. 

With the assist of Bob Corker, lapdog stooge of the banking industry, more piles of bad debt could soon be off loaded into pension funds everywhere.

It failed to pass at the end of last year.  The FDIC was opposed.

The NAR and Mortgage Bankers association are still promoting it.

Read the full text here...

chipworley's picture

BB is an academic tool with no experience for his position what-so-ever....

Popo's picture

Before becoming Master of the Universe, Bernanke served as a Fed governor for 2 years and before that he taught college.   Think about that for a minute:  A teacher with 2 years of non-teaching experience was handed the job of running the world economy.  There's only ever one reason you give a totally inexperienced person an awesome amount of responsibility:   You do that when you want a puppet who will blindly believe without asking questions.   Bernanke also suffers from personal vanity.  It was evident right away in his appearance, his endless photo shoots and in his accidental blabbing to Maria Bartiromo.  

Personal vanity + inexperience is exactly what the banking sector wanted.   And they got their man:  An obedient little automaton who is easily convinced of his own prowess despite endless evidence supporting the opposite.  

History will be brutal to the little man.  

He will of course blame the coming collapse on external events related to the collapse (War, social unrest, political instability, etc.) but everyone is already aware that his efforts to prop up the economy do little more than prop up the institutions and systems responsible for it's collapse. This is the powerful feedback cycle which accelerates America's make-over into a banana republic:  Banks create systemic instability, and Bernanke stabilizes the banks.  Lather, rinse, repeat.





HungrySeagull's picture


Give me that job and I will get this fucking mess fixed. Without so much talk.

tocointhephrase's picture

Without talk how the hell do you expect to move the market?

EnslavethechildrenforBen's picture

"The Market" is no lesser of an Evil than Bernanke himself. For one entity to gain wealth, another entity has to lose wealth. The little old ladies and working stiffs are not the ones that are benefiting from this game, they are the ones who are being preyed upon. Wealth doesn't come from a printing press or from thin air, it comes from theft, cons and scams like "The Market".

MeelionDollerBogus's picture

Consent and calculation are what make the difference.

In a market that is actively attacking corruption only mistakes or a few bad bets will lead to a loss that is another's gain. In equilibrium we can all gain by trading a loss of a specific nature to another who can reduce that loss using their own skills that no one else has. That is the purpose of markets, to produce and perform skills for which we are best suited that others are not. That's precisely the same thing as shifting potential loss to another for whom no loss will occur.

If you were suddenly stuck with a bunch of busted up cars you couldn't fix that you intended to flip you'd probably be very unhappy. Unless you're a mechanic looking for parts and flipping the fixed up vehicles and keeping the best one - in which case you'd probably be very happy but very busy.

Such is the same with any market. The key is CONSENT. Absurd nonsense trades which clearly leave you stuck with something NO one needs or wants shouldn't happen and without intervention by a money-printing fraudster... it WON'T happen systemically.

Once consent is restored and centralization is gone you have only yourself to blame for foolish choices and they won't be systemic - they'll be yours.

jeff montanye's picture

p.s. anyone else recently arrived at a pinnacle position with little experience and great personal vanity?

things that make you go hmmm?  (hillary might actually have been better; not much but some)

SokPOTUS's picture

The worst part is; it's 5 1/2 years later, and he still has the job.  How is that possible?

Mentaliusanything's picture

Word........ Ben has no tools ...he is a tool

oleander garch's picture

Professor Bernanke is correct to point out that in the last bubble the housing debt was in the hands of the private sector and then had to moved onto the books of the taxpayer.  With student loans, we have eliminated the cost of moving the debt from the private sector to the public sector since it is there already.  Technological breakthroughy.

Blagio's picture

Who listens to the Bernank anymore? We have T Durden.

r00t61's picture

Heli Ben is extremely useful as a contra-indicator.

Dr. Engali's picture

This system needs a reset in the worst way. The longer they continue to drag this out the more violent the reset will be.

THX 1178's picture

Yeah, but the longer it is drawn out, the more silver will be consumed for industrial purposes (in a supply deficit environment). So the longer it takes to crash the more valuable silver will be.

Prometheus418's picture

Problem with that is where the event horizon is.

I had a lot of physical silver- not enugh to be a major player, but far more than the average bear.  Note the past tense.

I have not in any way lost my conviction that silver is a good long-term investment, and to be sure, I still hold some for that eventual payoff.  The problem is that I'm a working stiff with three young children- it doesn't matter what I think silver might do, it has been dribbling out, albeit slowly, to cover food, gas and clothing expenses. If the crash does not occur in the next year or so, all I'm going to have is stories about the silver I used to have.

And that's the real problem, isn't it?  If you had enough to weather the storm, silver is a good play- but if you never had much to begin with, silver is just a rental.  If things stretch out too far, all a silver/gold standard after a reset is going to do is protect the oligarchs while the rest of us burn alive.

I'm not saying that silver is a bad play, just extending a word of caution- a great deal of what my household experiencing now is due to the voracious appetite and fast growth of children, but the way things are headed, even double-income-no-kid households are going to be rolling quaters for gas money soon enough.  Hard to hold the shiny stuff when it's a choice between liquidation or starvation.

LetThemEatRand's picture

The .01% do not have this problem.  By design, you do.

Monedas's picture

The upper 1/10th of 1 % .... the uber rich Socialist cronies like Soros and Buffet .... honest working Capitalists need not apply !

Barry Freed's picture

Mussolini didn't have that problem either until one day he was hanging from a lamp post.

hannah's picture

Prometheus418 you just proved my favorite saying...'buy gold today so you can be poorer tomorrow!'...thanks

THX 1178's picture

We're not all in your situation dude. 

"Hard to hold the shiny stuff when it's a choice between liquidation or starvation."

Buy food before the crash then and store it. Solved it for you.

MeelionDollerBogus's picture

Food that you can carry and other food you can store and protect. You may need to hunker down. You may need to run. You should prepare for both.

A Nanny Moose's picture

The parasite can never live without consent of its host.

Disenchanted's picture



To learn who rules over you, simply learn who you are not allowed to criticise.
— Voltaire

MeelionDollerBogus's picture

Not one parasite ever got consent from its host and it needs only a small population to keep itself alive in clusters using hosts as reservoirs.

BotMightFly's picture

  Given the food growing problem and its coupling to oil fertilizers, then add Monsanto's pay per crop and it looks like having seed, land and backup food is a great currency.

sessinpo's picture

"silver is just a rental."

"On a long enough timeline the survival rate for everyone drops to zero"


So what isn't a rental?


But I digress. Deflation has been my argument for sometime. Thus declining values in PMs was/expected. I've actually stated moderately rising values, but that is over a period of time - 5 years or so. After the 1929 crash, PMs fell. People needed cash to pay for things, not PMs. PMs are still good insurance and will continue to hold value relative to everything else, except cash (at least for a while).

MeelionDollerBogus's picture

Except by then most of the electronic needs of silver will be replaced by graphene. Perhaps some of the chemical needs too. Graphene is carbon which is nowhere near shortage.

CaptFufflePants's picture

Hitler has nothing on the American Baby Boomer generation.

old naughty's picture

Really? Is this why Nostramadus spelled his name HIS-ler?

sessinpo's picture

Or maybe he mispelled His ler and he meant He's lier.

q99x2's picture

UCLA here I come. Be sure to pay you back once I get to Costa Rica.

dick cheneys ghost's picture

Got my education for free at 'University of ZeroHedge'