The First Crack: $270 Billion In Student Loans Are At Least 30 Days Delinquent

Tyler Durden's picture

Back in late 2006 and early 2007 a few (soon to be very rich) people were warning anyone who cared to listen, about what cracks in the subprime facade meant for the housing sector and the credit bubble in general. They were largely ignored as none other than the Fed chairman promised that all is fine (see here). A few months later New Century collapsed and the rest is history: tens of trillions later we are still picking up the pieces and housing continues to collapse. Yet one bubble which the Federal Government managed to blow in the meantime to staggering proportions in virtually no time, for no other reason than to give the impression of consumer releveraging, was the student debt bubble, which at last check just surpassed $1 trillion, and is growing at $40-50 billion each month. However, just like subprime, the first cracks have now appeared. In a report set to convince borrowers that Student Loan ABS are still safe - of course they are - they are backed by all taxpayers after all in the form of the Family Federal Education Program - Fitch discloses something rather troubling, namely that of the $1 trillion + in student debt outstanding, "as many as 27% of all student loan borrowers are more than 30 days past due." In other words at least $270 billion in student loans are no longer current (extrapolating the delinquency rate into the total loans outstanding). That this is happening with interest rates at record lows is quite stunning and a loud wake up call that it is not rates that determine affordability and sustainability: it is general economic conditions, deplorable as they may be, which have made the popping of the student loan bubble inevitable. It also means that if the rise in interest rate continues, then the student loan bubble will pop that much faster, and bring another $1 trillion in unintended consequences on the shoulders of the US taxpayer who once again will be left footing the bill.

From Fitch:

Fitch believes most student loan asset-backed securities (ABS) transactions remain well protected due to the government guarantee on Family Federal Education Program (FFELP) loans. The Federal Reserve Bank of New York recently reported that as many as 27% of all student loan borrowers are more than 30 days past due. Recent estimates mark outstanding student loans at $900 billion- $1 trillion. Fitch believes that the recent increase in past-due and defaulted student loans presents a risk to investors in private student loan ABS, but not those in ABS trusts backed by FFELP loans.

Why is the bubble starting to pop now?

Several macroeconomic factors are putting pressure on student loan borrowers. The main ones are unemployment and underemployment. The Bureau of Labor Statistics estimates the current unemployment rate for people 20 to 24 years old at nearly 14% and for those 25 to 34 years old, 8.7%. Underemployment is difficult to measure for these demographics, but it is likely having a negative impact.

Actually, no: the unemployment for 18-24 year olds is 46%. Yup: 46%.

A month ago, Zero Hedge readers were stunned to learn that unemployment among Europe's young adults has exploded as a result of the European financial crisis, and peaking anywhere between 46% in the case of Greece all they way to 51% for Spain. Which makes us wonder what the reaction will be to the discovery that when it comes to young adults 18-24) in the US, the employment rate is just barely above half, or 54%, which just happens to be the lowest in 64 years, and 7% worse than when Obama took office promising a whole lot of change 3 years ago.


And while technically this means 46% are unemployed, or the same percentage as in Greece, the US ratio, which comes from Pew, shows the ratio as a % of the total population: a very sensitive topic now that every month we see another 250,000 drop off mysteriously from the total labor force. However, unlike those on the trailing age end, young adults by definition are the labor force in their age group demographic, so it would be difficult to explain away this horrendous number by claiming that ever more 24 year olds are retiring. Although, yes, we agree that some may be dropping out of the labor force in order to go to college, incidentally the locus of the latest credit bubble, where they meet a fate worse even than secular unemployment: they become debt slaves of the Federal System, with non-dischargable debt at that, which even assuming they can get a job would take ages to pay back!


But wait: there's more - of all age groups, this is the one that has actually seen its wages drop the most under the Obama administration.


So not only are they unemployed, young adults are at least poor.


Net result: double the change, zero the hope.

But fear not dear banks: taxpayers got your back, as usual.

However, we believe that ABS trusts backed by FFELP loans are unlikely to be affected by employment trends, as they are at least 97% backed by the federal government. In addition, recent securitizations have been structured more robustly and many have backup servicing agreements.

Even so, Fich is covering its bases nonetheless:

While FFELP loans are largely protected from these trends, private student loan ABS trusts, especially those that were structured aggressively and with less stringent credit standards before the recession, are expected to continue experiencing high defaults and ratings pressure. Fitch will continue to monitor these political and macroeconomic factors as they evolve and will determine any impact they may have on ABS trusts.

And as a courtesy reminder to our young up and coming "thinkers", this is $270 billion in debt that can not be discharged. Go ahead - file for bankruptcy - see what happens.

The question then is - what is the student loan version of the ABX trade. After all if Bernanke is willing to blow another bubble, someone has to be able to profit when this latest soon to be failed attempt at central planning.

Finally, here are some more perspectives on the student loan bubble direct from the New York Fed's blog.



    The average outstanding student loan balance per borrower is $23,300. Again, there is substantial heterogeneity in balances of individual borrowers. The median balance of $12,800 is roughly half the average level, which indicates that a small fraction of people have balances significantly higher than the median. About one-quarter of borrowers owe more than $28,000; about 10 percent of borrowers owe more than $54,000. The proportion of borrowers who owe more than $100,000 is 3.1 percent, and 0.45 percent of borrowers, or 167,000 people, owe more than $200,000. The distribution also varies by age group: for example, borrowers between the ages of thirty and thirty-nine have the highest average outstanding student loan balance, at $28,500, followed by borrowers between the ages of forty and forty-nine, whose average outstanding balance is $26,000 (see chart below).


    How much difficulty are borrowers having paying back their debts? Of the 37 million borrowers who have outstanding student loan balances as of third-quarter 2011, 14.4 percent, or about 5.4 million borrowers, have at least one past due student loan account. Together, these past due balances sum to $85 billion, or roughly 10 percent of the total outstanding student loan balance. To put this in perspective, the same 10 percent rate applies on average to other types of household delinquent debt, including mortgages, credit cards, and auto loans. Does this mean that the prospects for student loan delinquencies are similar to those for the household debt in general, and thus no special attention is warranted? (See chart below.)


    Unfortunately, this is not the case—some special accounting used for student loans, not applicable to other types of consumer debt, makes it likely that the delinquency rates for student loans are understated. In the case of federally backed loans, which represent a majority of total lending, repayment is deferred until the student graduates from school and can then be pushed back by another six-month grace period. How do these student loans in deferment or grace periods show up on credit reports and contribute to the delinquency statistics? Given that no payment is necessary until graduation, these deferred student loans are not included in the past due balance but they are included in the total balance from which the delinquency rate is derived. This may help explain the low proportion (12.6 percent) of borrowers with past due student loans among those under thirty years old, compared with 16.9 percent among those between the ages of thirty and thirty-nine, since many of the younger borrowers are still in school and don’t yet have to make any payments.

    To address this potential bias in calculating delinquency statistics, we exclude individuals who appear to be temporarily exempt from making payments because they are in school or newly graduated from school. These are students who, as of third-quarter 2011, owed as much as or more than they did in the previous quarter while maintaining a zero past due balance. We will be able to make our inference more precise when loan-level panel data are available, but this is our first-cut analysis given the available data. We warn that there is room for misclassification in this analysis. For example, there could be borrowers who are subject to the income-based repayment plan whose payment fell short of the accrued interest, resulting in a balance that increased. Recall that this exercise looks at the student loan borrowers who have a balance as of third-quarter 2011; therefore, those who had taken out a loan at one point but paid it off before third-quarter 2011 are not accounted for.

    From this exercise, we find that as many as 47 percent of student loan borrowers appear to be in deferral or forbearance periods, and thus did not have to make payments as of third-quarter 2011. Specifically, 17.6 percent of borrowers had exactly the same balance in the third quarter as in the second quarter of this year, and 29.1 percent increased their overall student loan balance by taking on new originations or accruing interest to the balance.

    We then recalculate the proportion of borrowers with a past due balance excluding this group of borrowers. We find that 27 percent of the borrowers have past due balances, while the adjusted proportion of outstanding student loan balances that is delinquent is 21 percent—much higher than the unadjusted rates of 14.4 percent and 10 percent, respectively (see charts below).



    In sum, student loan debt is not just a concern for the young. Parents and the federal government shoulder a substantial part of the postsecondary education bill. Moreover, the student loan delinquency picture is not fully captured in the broad statistics since a significant proportion of borrowers and balances are not yet in the repayment cycle. The implications of this last fact for future changes in the student loan delinquency rate are a very important area of research.

    Given that student loans are an indispensable tool for educational advancement, this form of debt will remain a critical policy focus for generations to come. Going forward, we will continue to monitor the student loan market with new data each quarter, and we will try to provide useful information on the landscape of student debt.

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Gully Foyle's picture

Diet Coke and F...

I see a lot of new people in government service, both foriegn and domestic.

B-rock's picture

Where is the trade here??

Gully Foyle's picture


With any luck there will be an influx of new young cheap hookers trying to pay off their student loans and buy organic free trade food.

vast-dom's picture

Gully: that influx of hookers has already happened a long time ago -- it's just that their good work hasn't been reflected in official employment data -- and let me tell you the whores are whoring extra hard because no one save for the banksters can afford their services; ergo, the rate of whores is exponential to the mildly declining rate of banksters and politicians and other scum. That doesn't bode well for big pharma since VD meds are not growth industry as of late, while S&M paraphenilia is on the slight uptick.

So extrapolate the short play as you will.

HoofHearted's picture

Nobody could have seen this coming...nobody.

Doña K's picture

There is a divergence between the burger index (inflationary) and the BJ index (deflationary). Is there an ETF on that?

TheFourthStooge-ing's picture


There is a divergence between the burger index (inflationary) and the BJ index (deflationary). Is there an ETF on that?

Yes, the ETF you're looking for is BONER. It's due to pop.


AnAnonymouses's picture

US citizenses debt show true US spirit.  US citizenses make great amusement for all in the world!

CompassionateFascist's picture

Chicom citizen has et the neighbor's cat. Stomach still rumbles. Nearest dog next.

Michael's picture

I remember cheerleading the collapse of New Century Financial and the housing bubble bust. It was awesome watching the carnage, and still is. We recommended everyone stop paying their mortgages at the time, as it was the right thing to do. We now recommend All students with student loan debt stop paying their loans on worthless educations, as the government can't get all of them, and it will make for great TV viewing.

vast-dom's picture

 that high-IQ racist spellchecker seems to be working out for you; hope you haven't been using that evil Jew search engine of late, you know the one that everyone's using....

The Big Ching-aso's picture



Nothing like being in hock for life for a shitty edgeukashun.

Oh regional Indian's picture

Education, it is the ultimate "Fitter".

Uni-Verse-ity. Everyone comes out singing the same song. It's like getting in debt for your own servitude.

My college loans chased me over the years of my living large with largesse right through my lean and hungry ones, steadily showing no reduction in principle, always more more more.... crazy. i bit ze bullet and pre-paid it all 4 years ago. In rupees. Pinched but the freedom received has been epic!



Oh regional Indian's picture

Thanks SO MUCH stycho, it's why I come here, for these re-directions. I had only heard his name.... his work is awesome!


ChrisFromMorningside's picture

It's a moot point. Even if the Feds ended up footing a one trillion dollar + direct loss on these loans, the losses will seem trivial compared to the contraction in the for-profit and private not-for-profit education sector. When the subsidized student loan gravy train inevitably ends, you could very well see a majority of for-profit colleges close, a third of all law schools, end of alot of the more niche post-graduate programs, major contractions in student enrollment in undergraduate colleges across the country, etc. By that point, we'll be near QE 4 or QE 5 and the idea that these loans COULD ever have been paid back will be absurd on its face.

Popo's picture

And just wait.  In two years we'll be bailing out the educational institutions to "save" them.  

America just refuses to accept any form of business cycle.  Things can expand, but they can never be allowed to contract.

One minute we're making too many houses, the next minute we're bailing out the builders.   One minute we're making too many cars,  the next minute we're bailing out the automakers.   And one minute we're spending too much on education... and next year we'll be "rescuing" schools from their own largesse.

The moral of the story is always the same:  Spend wildly beyond any responsibility (preferably using government aid), and then when your game falls to pieces (as it must), raise your hands to the government and cry out to be saved.




TheFourthStooge-ing's picture

AnAnonymouses said:

US citizenses debt show true US spirit.  US citizenses make great amusement for all in the world!

Yeah, sure. Made me raugh.

One of their tricks is to get you to convince them of anything.

That's exactry that. Dirution in the rarger base possibre.

Up to the stars and beyond.


GetZeeGold's picture



The greatest heist of the want a degree for basket weaving?


Sure.....that will be $200K.....sign here.


FEDbuster's picture

Unlike mortgages (which you could walk away from or discharge in bankruptcy), student loans are like herpes, they are with you forever.   These kids can run, but they can't hide.  Only death will discharge student loan debt (or some "public service" jobs). 

ck24's picture

Exactly why student loans should have a lower interest rate than most all other consumer credit.  It has the least risk.  Think about it, what has more risk?  A 30 year mortgage or a 20 year studen loan?  Yet, our government loans to students at an incredible 6.8%, and banks at 0.00% and homeowners at ~4%. Ridiculous!  We punish those wishing to make the country more competitive through higher education (yes, I know the education system sucks and provides miserable skills, but that is not the point) essentially forcing them into modern day serfdom.  Oh wait, maybe we should be using awesome 529 plans and give our money to the markets to grow so we don't have this predicament....sure.

This is criminal - SL loans should be pegged or floated against the fed rate, maybe 200 bps higher at all time.  This country sure has it's priorities all f*ed up!

CompassionateFascist's picture

"recent securitizations have been more robustly structured". Thank god for that.

lineskis's picture

Yeah, but there's still no inverse ETF on student loans... What a waste... </sarc>

MachoMan's picture

This would be a tremendous suggestion but for the fact that the student loans aren't for students...  they're for a bloated educational infrastructure...  in short, it is my suggestion we do not give loans of any sort for this type of endeavor...  unless there is some incredibly strenuous merit based methodology...  and even then it should be at a "real" market rate...  not any discount.  What you're suggesting simply helps the FED blow its bubbles (all it's good for).

Renfield's picture

Merit-based methodology = scholarship.

No loans.

And if the department (art history? womyn's studies?) can't afford scholarships that will cover all the costs, maybe the student will have to kick in their OWN money, or forget about art history at 20 years old, go to work for awhile. Leave the art history until they can afford it, in their 40s....

I can't think of a situation where a student loan should ("should") ever be necessary. If they aren't competitive enough for a full scholarship, and/or the department isn't competitive enough to offer that, then let the students pay for their own classes. And if the school wants a full class complement, let them charge accordingly.

StychoKiller's picture

You sound like a terrist, where's the DHS toll-free number... :>D

Gohn Galt's picture

Off topic.  But since you bought up herpes.  It is curable, just like every other disease, virus or infection.  During breakouts dose sore with H2O2 3 times a day.  You can do the purge to bring out the offset.  found at  This is highly scorned treatment as it works and costs almost nothing.  Plus you will have to think and take command for yourself and be your own doctor / scientist following the scientific method and using deductive reasoning.  If you are a triathlete or Olympian then you know about it a little bit, the Russians always use it.  It's runners high in a bottle.



Dave Thomas's picture

This sound intriguing. But don't your cells burn out quicker doing this? I mean all that extra oxygen....

It's better to keep your johnson triple wrappped, and have a healhy BAC of over .8 to keep those nasties at bay.


sablya's picture

Nah, all you have to do is pay off the student loan with a credit card and then declare bk.  

Extremist Tan's picture

In the bankruptcy of the deadbeat student, the credit card company would recover the money from the student lain servicer.

YC2's picture

Plan B quickly becoming a profitable Plan A.


whats credit for?  buying a house? lol...

A Nanny Moose's picture

Why? Obama and Bush looking for work?

Caviar Emptor's picture

Times have never been worse for pimps. Declining rich-boy clients, increasing overhead (or underhead in this case). Plus all those pimpy web-based dating sites are just eating their lunch....yet another formerly recession-proof industry hit hard 

Cathartes Aura's picture

indeed, the hooker index is trending in new directions, best to update your memes if you're going to trade this.

with the uptake in womenz "taking all teh jobz" the menz are pushing for equal job security, and are taking to the streets - and with the rise in porn usage, which promotes BJs and anal, men have realised their equal opportunity - everyone has a mouth and an ass! - and are now cornering the market as sex providers, thereby increasing their cultural worth again.

the good news is birth control won't be necessary in the future, as butt-babies are notoriously difficult to conceive, so no arguments as to who pays for what in "health care" and no life sanctity constitutional amendments are needed - win win folks!!  every body is happy!!

nmewn's picture

So go long astroglide and full body condoms, with the expectation of government subsidation of these products & corporations for the newly found rights of the peeps in question.

Excellent front running of the back door! ;-)

Jendrzejczyk's picture

Rats! You've foiled or manliness again. kudos.

Mac1492's picture

I don't post much but this topic hits to close to home for me... i graduted in 20010 with a modest 40000 in student loan debt allow me to transport myself in time back to 2006 when i was a young buck whith the world by its balls. I got accepted to a school that i could not afford but got an athlectic schoolship to cover 75% of the tuition, life was fucking good for about 2 years untill my jr year when realized that i couldnt make rent wih out getting a job. and it was then when i disovered zerohedge and realised just how out of whack the cost of eduation was..... high school teachers force college on their sudents there are incentives in place for teachers to get kids into college wethere they should be there or not..and kids who are 18 years old cant drink but can indenture thmselves to hundreds of thouseounds of dollars in student loan debt is crazy they can't drink  a beer but can take on so much debt is nuts.. and to top it off the debt cant be dischraged in court..SHIT IS OUT OF WHACK... in 1975 my uncle went to mit for 4 years for less then 15grand what the fuck?

UP Forester's picture

I take it you didn't major in English....

CompassionateFascist's picture

Of course he did. Do you think most of today's HS grads can write this well?

AgShaman's picture

Hahaha....I knew our youth had problems, but sheesh....we're totally fucked

URZIZMINE's picture

The utes. They are our future.

Mac1492's picture

haha good guess.. no i did not major in english althouth i wish i did because grammer is a dying thing ( you can thank 70 years of public education for that) when people are giving things for free like a public education the results speak for themeselves, however incohenrently and grammatically incorrect they may be you all still paid for it haha..

StychoKiller's picture

Looks like a good place for this link:


That worries officials like Terry Traynor, assistant director of the North Dakota Association of Counties.

"I'm fearful that it has a possibility of passing,"  Traynor said. "  The proponents have a very attractive message to sell:  Do you like property taxes?  If you don't, vote for this and they go away."

North Dakota counties get about 60 percent of their revenue from property tax, Traynor said. According to a ND Tax Commissioners report, cities and schools also depend heavily on property tax collections. Schools levied $331 million in 2010, counties $219 million and cities $113 million.

If that revenue disappears, the effects would be dramatic, Traynor said.

"Jan. 1 of 2013 every local government in the state of North Dakota will go bankrupt," he said.  "We'll have to stop plowing snow and teaching kids, because there just won't be any money after that."

In the north central North Dakota small town of Carrington, population 2065, Mayor Don Frye wonders if businesses will build in his city if the snow isn't plowed, or the sewers don't work.


Backers of the measure say there's plenty of revenue to go around without property taxes.  But local government officials say eliminating property tax would create chaos.


To which I can only reply:  BRING IT!

Freddie's picture

North Dakotia property taxes - Schools levied $331 million in 2010, counties $219 million and cities $113 million???  Huh?  The population is incredibly small.  These are big numbers for a state that probably has population less than 1 million.

Looks like the greedy state and local bureaucrats are greedy and evil - everywhere.  ND is swimming in nat gas, shale oil/gas.  The freaking Saudi Arabia of the badlands.

I used to think owning property was worthwhile.  Why?  You are a slave tto paying property taxes.  You don;t own shit - the county owns it with the bank.  

But local government officials say eliminating property tax would create chaos.

Chaos would be no money to pay local and state bureaucrats.

Uber Vandal's picture

"In the north central North Dakota small town of Carrington, population 2065, Mayor Don Frye wonders if businesses will build in his city if the snow isn't plowed, or the sewers don't work."

The town was founded in 1883 when the railroad pushed through the area.

So.... How, or why, did businesses settle there in the first place before there even was electricity, paved roads, and sewers?

How did schools get built in 1883, or roads, and how did snow get removed then?

Looking over the population records of the city, its current population is nearly what it was in 1950. Thus, it is very disingenuous to say that business will not locate there due to property taxes won't provide for sewers or snow plowing.


Big Corked Boots's picture

Ayup, you're employable.

Did ya git 'cher money back?