Posts
The
Next Subprime Crisis Is Here: Over $120 Billion In Federal Student
Loans In Default
27
September, 2012
Whereas
earlier today we presented one of the most
exhaustive presentations on
the state of the student debt bubble, one question that has always
evaded greater scrutiny has been the very critical default rate for
student borrowers: a number which few if any lenders and colleges
openly disclose for fears the general public would comprehend not
only the true extent of the student loan bubble, but
that it has now burst.
This is a question that we specifically posed a month
ago when
we asked "As HELOC delinquency rates hit a record, are student
loans next?" Ironically in that same earlier post we showed
a chart of
default rates for federal loan borrowers that while rising was still
not too troubling: as it turns out the reason why its was low is it
was made using fudged data that drastically misrepresented the
seriousness of the situation, dramatically undercutting the amount of
bad debt in the system.
Luckily,
this is a question that has now been answered, courtesy of
the Department
of Education,
which today for the first time everreleased official
three-year, or much more thorough than the heretofore standard
two-year benchmark, federal student loan cohort default rates. The
number, for all colleges, stood at a stunning 13.4% for the 2009
cohort.
The number is stunning because it is nearly 50% greater than the old
benchmark, which tracked a two year default cohort, and which was a
"mere" 8.8% for the 2009 year. Broken down by type of
education, and using the new improved, and much more realistic
benchmark, for-profit
institutions had the highest average three-year default rates at 22.7
percent,
with public institutions following at 11 percent and private
non-profit institutions at 7.5 percent. In other words, more than one
in five federal student loans used to fund private for-profit
education, is now in default and will likely never be repaid!
And
while it is impossible using historical data to extrapolate with
precision what the current consolidated federal student loan default
rate is, we do know
that there is now
$914 billion in
federal student loans (which also was mysteriously revised over 50%
higher by the Fed just a
month ago).
Using simple inference, all else equal (and all else has certainly
deteriorated), there
is now at least $122 billion in federal student loan defaults. And
surging every day.
Ladies
and gentlemen: meet
the new subprime.
Another
that quietly reported today on the change in the Department of
Education's default tracking methodology was Bloomberg in
"Student-Loan
Default Rates Soar as Federal Scrutiny Grows."
Needless to say, it was not impressed, because the new data indicated
that there had been a concerted push by all sides to misrepresent the
severity of the student debt problem, by over 50%. The "why"
is quite simple:
The Education Department has revamped the way it reports student-loan defaults, which the government said had reached the highest level in 14 years. Previously, the agency reported the rate only for the first two years payments are required. Congress demanded a more comprehensive measure because of concern that colleges counsel students to defer payments to make default rates appear low.
“Default rates are the tip of the iceberg of borrower distress,” said Pauline Abernathy, vice president of The Institute for College Access & Success, a nonprofit based in Oakland, California.
On the stump, President Obama has touted an executive order that eases the process for applying for a loan program that lets students make lower payments tied to their income -- easing their burden and making it less likely they will default.
Under the new three-year measure, colleges with default rates of 30 percent or more for three consecutive years risk losing eligibility for federal financial aid. Schools can also be barred from the program if the rate balloons to 40 percent in a single year. The sanctions don’t take effect until results are released in 2014.
There
it is again: a mega-government which gives amply with one hand, and
yet with the other skews the incentives in the system to represent
reality as far better than it truly is. One way to underwhelm reality
and to soothe the blow of the true extent of the popped student loan
bubble was using a shorter data cohort.
Some for-profit colleges encourage students to defer
payments in their early years, in an effort to keep down default rates that could jeopardize their federal funding, according to a report by the Senate Committee on Health, Education, Labor and Pensions released in July.
The report accused for-profits of using the tactic to manipulate their default rates. It singled out the role of SLM Corp. (SLM), the largest U.S. student-loan company commonly known as Sallie Mae. A subsidiary, General Revenue Corp. counsels for- profit colleges on keeping down default rates. University of Phoenix, owned by Apollo Group Inc. (APOL), is a customer, according to the Congressional report
Whether
or not the reason for the government to demand more accurate data was
to scapegoat the private sector yet again, what it did instead if
expose just how deep the student loan hole already is. Because now
that we know the revised default data, we can put it together with
the recently revised as of a month ago revised total student loan
notional number. Recall
from the Fed:
The revisions to the data are fairly substantial: as of our August report, 2011Q2 student loan balances were reported at $550 billion. We now estimate that student loans outstanding in that quarter (2011Q2) amounted to $845 billion,$290 billion or 53.7% higher than we reported earlier. These previously excluded loans were also missing from the total debt outstanding; as a result, our estimate of total debt outstanding in 2011Q2 is also revised upward by $290 billion (2.5%).
One
can see why everyone in the Federal administration has been so
reticent about disclosing the true state of the Federally-funded
student loan bubble. Because if one simply assumes the rising default
rate has kept constant across all recent cohorts since the updated
2009 number, it would mean broadly speaking, that of the $914 billion
in Federal Student Loans at least 13.4% will end up in default.
Over
$120 billion
Of
course all else is never equal: Federally funded student loans are
now increasing at a rate of over $60 billion per quarter. This means
that in just about 18 months, the total size of the Federal student
loan market will hit $1.3 trillion. Why is that number important?
Because that is how big the subprime market was at its peak in late
2007, when everything went to hell and the last credit bubble popped.
From Responsible
Lending:
As
can be seen on the table above, 20% of all subprime mortgages was
then expected to default (the ultimate number ended up being far
higher). Note that as mentioned above, already
over 22% of for-profit student loans are in default.
In
other words, the Federal student loan bubble has not only popped, but
has all the carbon copy makings of the next subprime crisis. Only
when it pops it won't be New Century and Countrywide Financial on the
hook: it will be all of America's taxpayers. Remember: these
are Federal loans.
And
the biggest problem: unlike housing where there is always at least
some recovery of collateral, as the house remains, with student debt
there is no recoverable asset as the asset is a human being. Granted
said human effectively becomes a debt slave courtesy of the
non-discharge nature of the student loan, which can not be wiped out
even with a personal bankruptcy, but assuming the taxpayer can
recover any money using discounted garnished wage flows of what are
effectively perpetual(ly discouraged) debt slaves of the system, is
simply idiotic.
We
give Bernanke at most 2 years before everyone is aware of the true
extent of not only the student debt bubble, but that it has already
popped, at which point student loans will be the next "asset"
to be monetized by the Federal Reserve.
See also the following
(from Max Keiser) -
The
percentage of student borrows who defaulted on their federal student
loans within two years of their first payment jumped to 9.1% in
fiscal year 2011, up from 8.8% the previous years, according to
Department of Education data released Friday.
As
the student debt burden has exploded in this 21st century, the
“century of change,” silver has increased its price level by a
similar percentage. With student debt continuing to spiral, the
silver price rise seems determined to persist. In the coming years,
as this student debt transforms the life of the college grad in his
and her professional dealings and personal lives, interest in silver
as a hedge against austerity will increase. Sith
student debt over $1 trillion already, could it be a source of
future, soaring silver demand in the United States? That is, if it is
not already.
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