Student Loans

Why are young people in America so frustrated these days? 

You are about to find out...

The system is failing, and young people are going to become even angrier and even more frustrated.

Almost exactly one year ago we wrote "The Next Subprime Crisis Is Here: Over $120 Billion In Federal Student Loans In Default" in which we took the latest (2009 three year cohort) loan default data on Federal Student Loans released by the Department of Education and applied it to the total amount of student loans outstanding, which back then was $914 billion. Yesterday, ED.gov provided its annual update - this time to the 2010 three year and 2011 two year cohorts - and to nobody's major surprise, learned that things just got even worse. To wit: "The national two-year cohort default rate rose from 9.1 percent for FY 2010 to 10 percent for FY 2011. The three-year cohort default rate rose from 13.4 percent for FY 2009 to 14.7 percent for FY 2010." Putting this in context, according to Bloomberg defaults have risen to the highest level since 1995. The irony that this is happening in the aftermath of Bernanke's disastrous ZIRP policy is not lost on anyone.

Rising income disparity in the U.S. troubles many of us, for a number of reasons. If more of the national income is flowing to the top 1/2 of 1% and less to those earning income from their labor, the foundations of both a vibrant economy and stable democracy are undermined. Many observers identify education as one solution for rising income disparity, as those with higher education (college) have more skills and knowledge and tend to earn more. Statistically, the connection between getting a college degree and higher incomes is weakening as those with college degrees are now in surplus. "More education" of the current sort is not a panacea to wealth inequality, as the widening gaps in education, employment and income are all reflections of a much larger set of forces at work.

Still Laundering Terrorism and Drug Money ...

That which is unaffordable is unsustainable and will go away. The current system of higher education is profoundly unaffordable: it exists on an immoral foundation of student debt--$560 billion of which is Federal. Enormous expansions of student debt are required to keep the current system of higher education afloat. Thus, the key question: does the current higher education system exist to serve students, or does it exist to serve those employed by the system? Those with vested interests in the system will naturally answer “both,” but to answer this question fairly, we must ask if an alternative system that accredits each student could serve students more effectively than the current system of accrediting schools.

With so many candidates dropping out of the race, one has to wonder why the attraction of the 'most-powerful' job in the world is fading. Perhaps it is not wanting to stuck between the rock of the 'broken-market-diminishing-returns' of moar QE and the hard place of an economy/market that is sputtering and needs moar. As Bloomberg's Rich Yamarone notes, There’s a little known rule of thumb in the economics world: when the annual growth rate of key U.S. indicators falls below 2 percent, the economy slides into recession in the next 12 months... and more than one of them is flashing red.

Imagine a huge, stinking mountain of debt, which represents all of the debt in the world... now look at this chart of student loan debt. Notice anything about this chart of student loan debt owed to the Federal government? Direct Federal loans to students have exploded higher, from $93 billion in 2007 to $560 billion in early 2013. This gargantuan sum exceeds the gross domestic product (GDP) of entire nations—for example, Sweden ($538 billion) and Iran ($521 billion). Non-Federal student loans total another $500 billion, bringing the total to over $1 trillion. Does this look remotely sustainable? Does it look remotely healthy for students, society, taxpayers now on the hook for a half-trillion dollars in potential defaults or the U.S. economy?

The Labor Force Participation Rate - in English, the percent of the population that is either in a job or looking for a job - fell yesterday to fresh 35 year lows. This is not a new trend, in fact since the end of 1999 (the dot-com bust) it has trended lower from well over 67% to the current 63.2%; which means the current unemployment rate would be almost 11% if the labor force was constant from when Obama took office. There appear to be at least four reasons (excuses) put forth for this dismal 'structural' trend but chief among them - and propagandized by most in the mainstream (given its lack of 'blame') - is the so-called 'aging of America' or demographics. There is only one problem with that 'myth'; it's entirely inconsistent with other Western economies who are experiencing exactly the same demographic shift. The collapse in the US labor force is, in fact, due to excess credit having fueled artificial growth for 3 decades; and now a government throwing free money at the population in the form of disability insurance (which has surged) and student loans (which are exponentially exploded). So who (or what) is to blame for the US' collapsing workforce? Simple, the unintended consequences of government interference.

Succinctly summarizing the weekly bull/bear recap, positive and negative news, data, and market events of the week...

• Summers Faces Key 'No' Votes if Picked for Fed (WSJ)
• NYT Editorial Board Says Summers Would Be Wrong Fed Choice (NYT)
• Russia says it's compiled 100-page report blaming Syrian rebels for a chemical weapons attack (McClatchy)
• China says Syria crisis can't be resolved with military strike (Reuters)
• G-20 Faces Growth Threats as Syria Adds to QE Exit Risks (Bloomberg)
• Apple Supplier Fire Spurs Biggest Chip Price Rise in 3 Years (BBG)
• U.S. Decided Not to Horse-Trade With Russia on Assad (WSJ)
• Financial Crisis: For Corporations and Investors, Debt Makes a Comeback (WSJ)
• Gorman Says Chance of Another Financial Crisis ‘Close to Zero’ (BBG) and in other news, "no risk of a Us downgrade" -  Tim Geithner
• A Biotech King, Dethroned (NYT)

If there is any one strikingly obvious feature of the U.S. economy in the past 15 years, it's the serial asset bubbles, one after another. So who benefits from serial bubbles? The financial sector and the central government...

If you know you are adding more fuel to the latest and greatest credit bubble - that of student loans - and the blended return will be zero at best, why do it? That's precisely the question JPM appears to have asked itself, and when taking into consideration the persistently rising debt rates and thus the even lower probability of repayment, came to the only logical conclusion possible:

• JPMORGAN CHASE TO STOP MAKING STUDENT  LOANS -MEMO - RTRS
• JPMORGAN CHASE WILL STOP ACCEPTING APPLICATION FOR STUDENT LOANS ON OCTOBER 12
• "We just don't see this as a market that we can significantly grow," said Thasunda Duckett, chief executive for auto and student loans at Chase

Which means that the government, that one lender that can't and won't pull out from the student loan bubble until it finally blows up, will be even more on the hook, and require yet another bailout of this latest $1+ trillion debt house of cards.

The president gave a speech on August 22 in Buffalo outlining his proposal to “reform” the student loan program. He acknowledged that the program has some problems, but assured the audience they are easily fixed. Just take the principles behind Obamacare and apply them to education. The president personally “guaranteed” that his proposals would make college more affordable. Here’s the plan..

Forget Gross Domestic Product (GDP) as a measure of expansion ("growth") or recession - what really matters is the social recession, which continues to deepen in America. The term social recession has two distinct meanings: around 2000, the term was used to describe the erosion of social cohesion via the decline of institutions such as marriage and the rise of social problems such as teen pregnancy. We use the term social recession to describe a very different phenomenon, the social and cultural consequences of permanently recessionary economies such as Japan, and now Europe and the U.S.

Financialization and the Neocolonial Model of credit-based exploitation leave immense human suffering in their wake when speculative credit bubbles inevitably implode.