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 In other words at least $270 billion in student loans are no longer current (extrapolating the delinquency rate into the total loans outstanding).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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Yardfarmer's picture

drunk? illiterate? or perhaps an attempt at satire? who knows.

Vampyroteuthis infernalis's picture

For all of you who think all college students are economic idiots (most are), here is my story. I have three degrees from two different universities. All useful engineering degrees (not lesbian degrees) and I have zero in debt. The entire BS cost $35,000 lock stock and barrel. My folks had no problem helping me pay the bills. My graduate degrees, zero $. I paid off my wife's loans recently. This means we have NO studnet loan debt. You can graduate with good degrees if smart. Go to a good public university and earn a good degree.

Going to Ivy league/private universities is just stupid. Earning a liberal arts degree is stupid. Pure indoctrination. These kids should suffer for being stupid.

YC2's picture

Where did you get $35k plus 4 years living expenses (engineering maybe 5)?


Did you forego sleep or did your parents pay?


Im just curious who is throwing stones here.

lenitivelea's picture

Congratulations on having the foresight to be born to parents with money. 

Caera's picture

Private universities may not be stupid in all cases. My state colleges offered me loans for part of my tuition. The private liberal arts university I attended gave me a full ride.  Double major and a minor in 4 years and no debt for the BA, and paid for my MS 10 years later as I went. Liberal arts may not be as immediately/obviously useful as hard sciences, but I've started a consultancy and another business that were both in the black from the beginning and are still going strong; my undergraduate education helped with that.

Central Bankster's picture

This is bullish for stocks right?

vast-dom's picture

Yes and No. All depends on the number of lashes and the amount of Ctrl+P keystokes.


PS everyone's a whore, we're all just negotiating price.

A Nanny Moose's picture

Maybe we can repo those young brains, to feed the resulting zombies...ahhh!!!

hairball48's picture

I wish some of those young cheap hookers would show around here 'cause I'm old and poor :)

TWSceptic's picture

LOL let's just hope the govt will not step in and decide minimum wage for hookers, oh wait... did they already?

Antifaschistische's picture

There needs to be a good way to short the University of California system

magpie's picture

Would it make sense to short the state itself, then ?

A Nanny Moose's picture

PM's, expatriation and boating "accidents."

Oracle of Kypseli's picture


Start a new university and hire professors who actually teach. Many foreigner professors who speak English are dying for $75k jobs, instead of $1MM.

Lease a building get a licence and start charging reasonable fees and you will be making millions. Best opportunity ever.

Best revenge: send your kids to college in Europe's eastern block. The easiest language there is Romanian. For a bit more money Italy, Spain and S. America are also good.

Don't pay these arrogant and exorbitant prices here.

streetcrawler's picture

III. Payment for study:

Payment amount for an academic year varies between 700 and 1690 Euro, depending on the specialty, the form of study and the language of teaching. Every foreigner at the time of registration, have to pay the tuition fee for at least one academic year. From the second year of study, payment can be accepted in installments during the academic year.


overbet's picture

+1 same question. How do we make money here? There has to be something better than shorting SLM. The problem with student loans as opposed to mortgages is that you cant erase the debt right? It stays with you forever if you dont pay it, always tarnishing your credit report unlike other debt that can only be reported for so long.

JLee2027's picture

Yes, until the currency dies. Then all debts with that currency are erased.

Caviar Emptor's picture

Or until the politicians vote for another taxpayer bailout

MachoMan's picture

How so exactly?  First, in our biflationary environment, WAGES ARE STAGNATING OR DECLINING...  so, that wheelbarrow full of money is going to come from where? 

Second, this debt is not extinguishable and may very well be with a governmental creditor...  if you think that there will not be a conversion into another currency or some other type of rule attempted to be implemented, you're crazy...

Get back on the treadmill son and quit your dreaming

JLee2027's picture

I'm right, I've researched it.  And I'm not dreaming.  When the currency dies, the debts are inflated away. They won't be "convertable" or worth the effort. The other possibility to keep calling it the dollar and return to a true metal standard will require a reset of debts (and asset values). A full reset, not a partial one.


MachoMan's picture

What the fuck have you researched where the world's reserve currency died AND the world's police force and most entrenched control group just gave up?

In the end, you need a mechanism to get the dead currency into the hands of the debtors...  my question is pretty simple...  what is this mechanism?  At present, the only people getting the spoils are the principal actors in the fraud...  and their more direct enablers.  Further, there is no telling how long it would actually take for the money to be printed AND flow into debtors' hands, but I'm thinking it literally might not even be possible to print that much money (at present denominations for sure).  It would take a manhattan project.

You're arguing from induction without reference to why the general rule works in this particular situation...  this is not only incredibly lazy, but it requires the rest of us to guess.  I'm not in the business of guessing, nor making peoples' arguments for them.

And yes, we can agree that a contract is written in a particular currency (generally).  And that to change the contractual currency, after the fact (given the death of the contract currency), would be a breach and/or ineffective, barring mutual consent.  However, this does not change the fact that there are swaths of people who the rules get changed for at the drop of a hat and always to their detriment...  nor that you have not connected the dots between generic demand pull inflation and our present enigma.

JLee2027's picture

Fractional reserve banking.

We are one bond market panic/cascade bank failure away from needing to print trillions (at least 5 trillion in bank deposits exist - FDIC numbers) of depositors dollars as people demand their money (most of it is electronic and does not exist except in a computer right now - which is why when you need say 10K in cash they have to "order it".). Voila, instant hyperinflation as the FED goes into physical print mode.

I don't think most people understand how Ben and the politicans are playing with fire and will eventually get burned. And the FED will have no choice but to print or face pitchforks so to speak. 

Of course, there is a chance that the "wipeout" will be allowed and no printing to avoid hyperinflation. In this case, everyone goes broke and the currency (and debt collection) are effectively dead.  We reboot with a new currency, in the interim I would again suggest hoarding Silver coins because this is an instant restart and you are protected in either case.

dogbreath's picture

could you expand on that.   what happens to your obligation when say greece dumps the euro.   so this is the why they are trying so hard to save the euro and the usd.

JLee2027's picture

I'm talking the US Dollar, not the Euro. Might be the same, might not.

Oracle of Kypseli's picture

@ overbet

Only the loans that were originated lately are non-dischargable. All existing student loans can be defaulted on, one way or another.

ExpendableOne's picture

A debt that you can't pay and can't discharge would seem to == lots of people owned outright by the government.  Look for a scheme to trade work for debt discharge coming to a a federal government near you soon.  Need some warm bodies to fill an arena for a speech?  No problem we have em.  Need a mob to take out that pesky right wing competotor?  We can handle that too.

There's more to it than simply a debt that can't be discharged.  I think this was setup from the beginng as a recruiting tool for some as yet unknown organization.  

UP Forester's picture

You've never heard of the draft?

The higher your debt, the sooner you're chosen.

Son of Loki's picture

yet another reason for Ben to devalue the currency....

Remember, devaluation favors debtors.

cranky-old-geezer's picture



How do we make money here?

A few people made boatloads of money shorting MBS in '08.

Now we have "student loan asset backed securities" or SLBS (my acronym for them), and the student loan bubble is about to pop just like like the mortgage bubble popped in '08.

Just substitute "student loan" for "mortgage", do the same thing MBS shorts did in '08, and maybe you'll make boatloads of money like they did.

But I don't have a clue how you would do it.  i'm not in that market.

And what's the next debt bubble?  We had the mortgage bubble, now the student loan bubble.  What's the next debt bubble gonna be? 

I mentioned earlier bankers don't really care about ever getting the principal back, and don't care if they lose it altogether.  They want the fees and interest.  That's where they make their money.

Whatever student loans default will be made good by the government anyway ...with printed money of course.

StychoKiller's picture

"The center cannot [yea verily, WILL NOT!] hold."

devo's picture

Short the for profit colleges. ~90% of their revenue comes from govt loans.

Apollo Group is UPhoenix...completely unsustainable model and an obvious short. Use options/puts.

Stax Edwards's picture

Good call!  Come reform time all the ITT's, DeVrys, and UofP's will be the shorts de jour.  Will be watching for heavy long dated put activity.  You sir are a gentlemen and a scholar.

devo's picture

No problem.

This is a good time to buy long dated puts or leaps since the Vix is so low. But, I don't think the student loan bubble bursts until next year or possibly even later; the reason being that the govt methodology doesn't account for many of the actual defaults, students can defer for 3 years, etc. It's more complex than you'd think and can be dragged out. So, research everything and try to short at the right time.

sun tzu's picture

UofP contributes heavily to democrats so they are protected like GM, Goldman, and the unions

devo's picture

But we're nearing the point where there's no money (with value) for bailouts. The "middle class" is poor, so who is going to pay? The rich won't. So that leaves the printer, and hyperinflated dollars. Seems like a good short. The timing is the only question.

Freddie's picture

They took a major beating back around April 2010.  The catalyst was a young woman who went to one of the ones (Art Institute) owned mainly by Goldman Sachs.  She was told she would make $80,000 a year designing video games.  She graduated with over $70,000 in debt.  She ended being a stripper in Cocoa Beach to pay back her loans.  She sued and it actually caused them all to tumble back in April 2010.  The majority of those scchols tanked at the time. Some have not recovered.  She sure kciked the hell out of their market cap for the whole industry.

The bloomberg story is Aug 2010 but I think she helped kick start it in the spring 2010

You are right that it may be over.    

All of this sh*t is child abuse.  It is really sick.

RafterManFMJ's picture



The ship was the pride of the American side coming back from some mill in Wisconsin. As the big freighters go, it was bigger than most with a crew and good captain well seasoned, concluding some terms with a couple of steel firms when they left fully loaded for Cleveland. And later that night when the ship's bell rang, could it be the north wind they'd been feelin'? The wind in the wires made a tattle-tale sound and a wave broke over the railing. And ev'ry man knew, as the captain did too 'twas the witch of November come stealin'. The dawn came late and the breakfast had to wait when the Gales of November came slashin'. When afternoon came it was freezin' rain in the face of a hurricane west wind.


TheFourthStooge-ing's picture

Fellows, it's been good to know you.


cjbosk's picture

The trade is to go short Obama.  And no hedge required

I think I need to buy a gun's picture

who are the few soon to be very rich? Everything is fine out there people alot of traffic alot stadiums are FULL!!!!

Banksters's picture

Jon Corizine crafted the recovery!  Jobs for everyone...

Dugald's picture

And by your spelling you are not......

This is so far down the page now its annoying.....

nasdaq99's picture

I hate to say it but Zerohedge is definitely turning into Chicken Little reading.

Go back an look at what currently populates the front page!  Nothing but scare mongering!  I mean does anybody expect student loans to be current?  So what?  They can't even shake them loose in bankruptcy!  So freaking what?

Tyler, you should just come out and say it.  It's good for healing.  "I missed the huge freaking rally because i was skeered".  

As you well know, you have to be right about content and timing too.  You are right about what's ailing this economy, and you are not unique in this, but your timing stinks so YOU LOSE.  AND you are starting to get a reputation for being only about page views.  So you have a fork in the road.  Choose carefully.

B-rock's picture

... except shit is actually falling apart.

AssFire's picture

Yes, when people are under the assumtion they are entitled to a college education; shit is actually falling apart.

Like in Greece:

Greek students pay no tuition, a fact enshrined in the constitution, so there’s no incentive to leave college, said Alan Ruby, a senior fellow for international education at the University of Pennsylvania in Philadelphia.

“Greece has a high consumption of higher education without effective application,” Ruby said. “It’s not being used in economically productive terms. The state is not getting a return on investment.”


Here many mediocre students are pushed into college when the degrees they compete for offer no possibility for employment except for crap like community organizing..thereby creating exponential destruction and deficit should they be chosen to be the puppet...ahh President.