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 In other words at least $270 billion in student loans are no longer current (extrapolating the delinquency rate into the total loans outstanding).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



Dunno, but the fluoride adds a nice touch.

Die Weiße Rose's picture

sorry, was that 130,000.00 gallons or litres we are talking about ?

Since a Gallon has ca 4 litres that would be 520,000 litres for one Hamburger ?

that would be 520 tons of water -

What sort of Hamburger are we talking about ?

just wondering...



Seasmoke's picture

i like White Castle better than Fuddruckers hamburgers.....whats the problem ?

Tom Green Swedish's picture

No problem at all.  But how would you like to roll the cost of your white castles back to a nickel? 

TheFourthStooge-ing's picture

They're spelled "sliders".

"But how would you like to roll the cost of your sliders back to a nickel?"


Tom Green Swedish's picture

I wouldn't. We can keep the cost the same, but charge the Saudis 25 dollars for one of those all beef patties.

TheFourthStooge-ing's picture

Screw that, I'd rather have sliders for a nickel. You could buy a whole sack of belly bombers for a dollar.


TheFourthStooge-ing's picture

Tom Green Swedish said:

USA is getting screwed royally because we are so friendly.

Made me laugh. You know, eternal nature of US citizenism and all that.

It takes 13000 gallons of water to make 1 hamburger.

It takes 55 gallons of diesel fuel for every single blueberry imported from South America.


Tom Green Swedish's picture

My question for you stooge is this. Where is the beef?

TheFourthStooge-ing's picture


My question for you stooge is this. Where is the beef?

It's with the chicken, seafood, and pork, next to the dairy section.


HamyWanger's picture

It must suck to be a libertarian. Hating so much life and other people you are obliged to rejoice over less youngsters going to college and having an education due to the recession.

It was so much better at the time of children working in coal mines, wasn't it? 

tmosley's picture

Who said anything about them not going to college?  They just aren't paying for it.  All for that here.

HamyWanger's picture

You perfectly know what I meant, and you are embarrassed by it.

Fact is, a lot of libertarians right now are rejoicing over this piece of news. I've been in close contact with them longer than you, and this makes me all too knowledgeable about the insane levels of sociopathy in this milieu.

gorillaonyourback's picture

hamy i dont think libs are rejoicing,  they are amazed at the effort of keeping this ponzi scheme going.

its like having a nice fillet mignon dinner, waking up the next day and taking a crap then pulling the shit log back out of the toilet and trying to prepare that shit log for dinner and thinking you gonna get that fillet mignon dinner again.

sometimes its easier to flush the shit down the toilet and start from scratch

tmosley's picture

No, I don't.  This has nothing to do with going to college, and everything to do with not paying for it.

When the bubble bursts, the government will step in just like they did before, and then they will be making loans directly to the students with very favorable terms.  Not that that is what I want or don't want to happen, that is simply what WILL happen.  Or everything will collapse, which is unlikely.

So quit yer bitchin'.

magpie's picture

Dunno, would a degree in gender studies stop me from getting a job in a coal mine ?

TheFourthStooge-ing's picture


Dunno, would a degree in gender studies stop me from getting a job in a coal mine ?

Not as long as you could discern the masculine coal from the feminine coal and treat each without culturally biased preconceptions.


Cathartes Aura's picture

one needn't be "degree'd" in gender studies to benefit from the awareness of how gender is used - like "race" and "sexuality" - to put individuals into categories to exploit accordingly.

once the meme is thoroughly understood, many aspects of global cultures, including religion, become very obvious in their labeling of humans, (and even in how one is encouraged to label oneself, the better to be re-cognised by others), thereby making the whole task of owning your mind that much easier.

but if one is invested in their cultural identity, and thus receiving benefits or bonuses, it does make the study much more difficult - best to go for "work experience" along the way. . .

(no downvotes from me guys. . .)

Marc_W's picture

There is definitely a strain of so-called libertarianism that is really just elitism longing for the implementation of neo-feudalism.  You see it in the articles where millionaires talk about how other millionaires can take their millions of dollars and expatriate from the U.S., avoiding any taxes.  These fake libertarians want weaker/smaller government not so everyone can be free and with equal "rights", but so they can enslave their fellow man and impose their will upon him without government standing in the way.

francis_sawyer's picture

Maybe they just want to get away from people who make idiot comments on blogs... You never kno...

Tom Green Swedish's picture

The problem is not the debt. The problem is the cost. Just like the housing bubble, it is overpriced.  Hold off on college. Steal a job from a Mexican, and form a union of the jobs they do, which there are none of right now.  They will go home, then you can go back to college when things are better, and the price has dropped because nobody is going to college.  Heck most college students are over 30 anyways.  You might as well spend your youth doing fun easy things.

magpie's picture

With all due respect, what makes you expect falling prices in a government subsidized business like the education complex in an inflationary environment ? 

Tom Green Swedish's picture

 Costs are soaring twice as fast as inflation, even as salaries for graduates are falling.  Colleges do not follow normal supply and demand economic rules.  But at least you "the dumb lazy people who think they should go to college because Obama told them" can stick it to them.  They can't make the price so high nobody can afford it.  I value my college education more than anything I have, but not everybody should go to college (which I learned in college),  and that is why the price has increased.

magpie's picture

Perhaps a bailout would be arranged, and if they are insulated from the normal supply and demand, i still don't see how the education "strike" is going to work. They will just keep raising prices IMHO. Bailout rules, like the banks hiking their fees on top of non-existing interest rates.

Tom Green Swedish's picture

They can't keep raising the price.  It is a bubble which will eventually have to pop just like the housing bubble.  But I have a better idea.  Charge the foreign people who come here just to get an education and leave a higher price and use that to subsidize American citizens educations.

magpie's picture

Might only work as long as they don't figure out to study elsewhere ? Though you might be luckier since the UK trebled their tuition already. 

And if we are talking government price controls, just lower the tuition on "useful" and raise it on "useless" subjects - though the Obama Czar on Re-Education might have many diverse opinions on what constitutes "useful" or "useless".


Tom Green Swedish's picture

Where else would they study? If they want the best they should have to pay for the best.  People who originally came had a much harder time, then these babies who come here to get an education will ever experience. They should not just allowed to prance on over and walk on our backs.  I will not allow that.

magpie's picture

OK, i understand that you wouldn't want to educate your future competitors almost for free... 

TheFourthStooge-ing's picture

Tom Green Swedish Meatball said:

Where else would they study? If they want the best they should have to pay for the best.

Yeah, but they seem to be OK with just studying in the US.

People who originally came had a much harder time, then these babies who come here to get an education will ever experience.

No comma, and the word is "than".

"People who originally came had a much harder time than these babies who come here to get an education will ever experience."

They should not just allowed to prance on over and walk on our backs.

"They should not just be allowed to prance on over and walk on our backs."

I will not allow that.

So why are you allowing college tuition to rise? You really should do something about that.

By the way, did you know that making a college textbook requires four acres of old growth forest and lowers the level of Lake Mead by three feet?


TheFourthStooge-ing's picture

Did you know that throwing a piggy off a hill results in the destruction of three hectares of Amazon rain forest?


TheFourthStooge-ing's picture

Did you know that fake moustaches are made from petroleum products, aren't biodegradable, and have created a huge debris field in the Pacific which is harmful to sea life?


Big Corked Boots's picture

If I read all the messages in this thread, do I get a sack o' White Castles?

Tom Green Swedish's picture

Only if you live in Qatar. If  Big Mac is 68 cents there a sack of White Castle is free.

TheFourthStooge-ing's picture

Big Corked Boots asked:

If I read all the messages in this thread, do I get a sack o' White Castles?

Yes, indeedy, a bag full of sliders is yours.

"Buy 'em by the sack, puke 'em by the roadside."©


Catullus's picture

Just like the housing bubble, the price is being driven up by the debt.  Everyone can see it.

Tom Green Swedish's picture

Exactly, just like credit cards.  When there is bad debt written off everybody else has to suffer because the banks have to make their money and bonuses.

Benjamin Glutton's picture

the problem is requiring a college education where it is not necessary.


While being prepped for dental surgery I struck a conversation with the dental assistant about his educational background. The only schooling he ever received was 3 months EMT training. He now teaches EMT courses at a local college which offers a four year degree to become an EMT in our state. His 3 months of school from 1975 have led to jobs in ER's,dental assistant and a teaching position as well as licensing for each.


Marc_W's picture

He was working in an ER as a medical technician, which make pretty crummy wages.  Nurses in the U.S. require at least a 2 year degree.


Those low level medical roles you've talked about have never REQUIRED a degree.  Never.


I'll let you in on a little secret though.  Anyone with an IQ 120 or above doesn't really need a degree to do anything.  They just need some books/the internet and mastery of their native language along with motivation.  Most modern "education" is really little more than job training.  Attendance is now mandatory throughout the higher education system.  Miss 3 classes and you fail the class.  Back in my day the professors didn't care if you only showed up for the mid-term and final.  And some of us did, and made it through with a B average.


It's simply the dumbing down of the higher education system to public "high school" levels.  Showing up and completing busy work is enough to get a degree.  And luckily for these newly "educated" college grads, that's all 99% of jobs in America require.

TahoeBilly2012's picture

There is no US taxpayer left to foot any bills...isn't that the whole point?

Technical Bard's picture

I suspect one of the reasons for this is also that the generation of people under 30 today are members of the "entitlement" generation - they believe they shouldn't have to work hard and they have never learned the math and ethics that say you pay your debts.  They want that (possibly useless) college education, but believe they should be given it - and we let them set us up by "lending" them the money with a federal guarantee...  they will default because they don't understand responsibility.

dwdollar's picture

They are only emulating the people in charge.

SheepleLOVEcheddarbaybiscuits's picture

well yu can blindly blame the current generation with ethics, sure that would be the easy way out for a mind that doesnt want to rationally think. Why dont we go deeper into this, shall we? Look at the large propaganda stigma associated with the youth in america regarding college educations and the subsequent labor market that they will enter. The employment market in America is deteriorating significantly and has been for quite some time now, due to lack of industrial and manufacturing sectors and a transformation into service economy driven by crony capitalism.Not to mention the federal reserve keeps devaluing the local currency which makes input prices rise and employers raise prices due to compressed profit margins, and since they are operating rationally for the largest profit possible, they will cut overhead ie. EMPLOYMENT! This is not rocket science......So do not blame the gen x for this entitlement bs, bc that statement has no empirical evidence nor rationale.

dolph9's picture

The most entitled generation in the history of mankind is the baby boomers.  Without a doubt.  A whole generation of people who believe it's their God given right to become a millionaire, own multiple cars and boats and homes, and drive and fly around the world whenever they feel like it.

Too bad, because their wealth, mostly in paper assets demoninated in dollars, will disappear.  And then they'll find themselves old and broke in a collapsing world.  Not exactly the best fate.

Ima anal sphincter's picture

I think I've smacked it out with you before, but I guess round 2 is needed.

Blow me, mother fucker.

I work my ass off and have never EXPECTED anything from anybody. You're a punk who has no fucking clue. The boomers fed, clothed, and housed your fucking ass. Download some kids and raise them. haven't done that yet have you? Twenty something dumb-ass who thinks he knows it all. Life is going to come up and slap you in the face very soon ... I hope it hurts.

johnnynaps's picture

Slaves too were fed, clothed and housed! Just out of curiosity, do boomers feel entitled to retirement funds? Because how I see it, the expansion of the fed gov's balance sheet to prop the dow is theft from other generations to serve the generation who has the most skin in the game. And it's not generation x or y.

Ima anal sphincter's picture

Well......I guess since you're not going to get shit, you might as well learn some skills. Do you know how to grow food? Can you fix a car? How about plumbing? Build ANYTHING? Gut a deer?....................Guess not.

Pretty damn good at keyboarding and playing computer games I bet.

My company stole my retirement. My government stole my future S.S. My paycheck is robbed before I get it and after when I go to the store.

I'm planning on taking care of my own. I hope you have someone to "take care" of you.