The Next Subprime Crisis Is Here: Over $120 Billion In Federal Student Loans In Default

[dkf]

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 ever released 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

http://www.zerohedge.com/news/2012-09-28/next-subprime-crisis-here-over-120-billion-federal-student-loans-default

[Mnemosyne]

1. Insanity. nt

[ProSense]

2. This sounds like pro-bank

anti-regulation fear mongering.

Republican challenger Mitt Romney said that initiative encourages students to take on more debt. Romney advocates cutting education regulation and encouraging colleges to become more efficient, lowering costs partly through the use of online instruction.

That's from the Bloomberg article linked to in the OP piece: http://www.bloomberg.com/news/2012-09-28/student-loan-defaults-soar-as-government-scrutiny-grow.html

[dkf]

3. The federal government took over federal student lending in 2009.

http://www.insidehighered.com/news/2009/09/18/aid

Can't blame the banks any more.

[ProSense]

4. They did?

I'm shocked!

Think that has anything to do with the pro-bank, anti-regulation fear mongering?

[ProSense]

5. Need more proof this is RW driven:

Ryan Vague On Plan To Ease Student Debt Burden

Paul Ryan was vague when asked what a Romney-Ryan administration would do to ease the debt burden on college students at a town hall in Cincinnati, Ohio Tuesday.

Ryan blasted President Obama's student loan reform as a "government take-over" and cited rising costs as part of the problem but declined to give a specific alternative. "We need transparency, we need competition," he said. "So we've got a number of proposals to help us do that." From there, Ryan discussed the need for economic growth.

http://livewire.talkingpointsmemo.com/entry/ryan-vague-on-plan-to-ease-student-debt

This fear mongering is all being driven by the fact that Obama reformed the federal student loan program, taking the banks out of the equation.

5 Reasons the Student Loan Crisis is Nothing Like the Mortgage Crisis

Ever since the Consumer Financial Protection Bureau declared that student debt had crossed the $1 Trillion mark, there has been an endless stream of

headlines declaring this the next big crisis in the US. With the US and many other countries still reeling from the 2008 crisis this has many people asking if this is the next mortgage crisis.

Here are 5 reasons why its not even close:

1. The size of the market is much, much smaller.

2. The Private loan market is an even smaller percentage of that.

3. False assumptions are not feeding the crisis.

4. You can’t get out of your student loans by declaring bankruptcy.

5. People see this one coming.

- more -

http://www.forbes.com/sites/marcprosser/2012/08/22/student-loan-crisis/

[dkf]

6. Student loans are worse than mortgage debt because you can't get out of it.

You don't even have anything to turn over as collateral.

http://www.jamesaltucher.com/is-michelle-obama-ruining-the-american-dream-for-my-kids/

You know how you can get rid of this debt? Only two ways. A judge can declare you “legally hopeless” AFTER you declade bankruptcy. Bankruptcy alone will relieve all of your other debts but not your student loan debt. The US government,... will still seize all of a 25 year old’s bank accounts and garnish any wages if they are bankrupt and not paying down student loans. You have to be also “hopeless”. And then there’s only one other way to avoid paying down the debt. You can go to war. And there’s plenty of it... Iraq is now just a colony of Iran. We’re still in Afganistan. We’re bombing Syria. We have military bases in 195 countries.

[ProSense]

7. No, it's still a very small market by comparison. Here's an idea:

student loan forgiveness. Screw the banks and those who think deregulation is the answer.

[dkf]

10. One in five households is not a small market

Nearly one out of every five U.S. households _ 19 percent _ owed some student debt as of 201o, an increase from 15 percent in 2007, just before the onset of the recession, the Pew Research Center said.

Pew, using government data, also determined that 40 percent of all households headed by a person younger than 35 have student debt, a record.

The relative burden of student debt is greatest for households in the bottom fifth of income, even though people in this group are less likely to attend college.

Since the recession, student debt has increased in nearly every demographic and economic category.

http://blogs.ajc.com/business-beat/2012/09/28/number-with-student-loan-debt-increasing/?cxntfid=blogs_business_beat

[ProSense]

12. What?

It's a very small market compared to not only the number of households, but also the amount of the debt.

This is nothing like the mortgage crisis. Nothing.

[Sirveri]

15. So what. You want stimulus money I can't think of a better thing than free education.

wipe out the student debt and call it a day.

[MadHound]

8. One of the big problems with increasingly unregulated capitalism,

The economy goes from one bubble to another, quicker and quicker, to the point that it can't recover in between pops.

[DCBob]

9. The difference is the defaults wont all hit at the same time.

I think the economy can absorb it if they come slowly and gradually.

[dkf]

11. 13% are in default within 3 years. That is not good.

[DCBob]

13. Not good but "manageable" in my opinion.

The subprime crisis pretty much hit all at once.

[Ikonoklast]

14. OH NOES!

Zerohedge hyperventilating again and the gullible eat it up.

This is troubling news, troubling news indeed.

[reformist2]

16. Actually, it's good if this sheds light on the internet diploma mills.