The student loan bubble bursts

ZeroHedge has been waiting for the student loan “bubble” to pop, and they think the “quite ghastly” third-quarter numbers might just be the beginning of the end.  Total federal student loan debt (which is only part of the short-circuiting student loan system) shot up $42 billion to hit a “gargantuan” $956 billion.  Even worse, there was a huge spike in the two worst parts of the delinquency spectrum: new delinquencies, and past-due balances that have aged beyond the 90-day threshold, at which point debts become exponentially more difficult to collect.

According to the Federal Reserve, “Of the $42 billion, $23 billion is new debt while the remaining $19 billion is attributed to previously defaulted student loans that have been updated on credit reports this quarter. As a result, the percent of student loan balances 90+ days delinquent increased to 11 percent this quarter.”  No balance sheet with 11 percent of a massive liability floating in the 90-day Sargasso Sea is in good shape.

So we’ve got about $120 billion worth of loans teetering on the brink of outright default, bringing unpleasant echoes of the subprime mortgage crisis.  At the same time, an awful lot of new borrowers are promptly slipping into delinquency, even though the loan rates have been pushed down to ultra-low levels with taxpayer subsidies.  When the sputtering fuse of the new delinquency wave hits the gunpowder of uncollectable elderly debt, a fiscal explosion will be the result.

And even these grim numbers carry a heavy coating of sugar, because some rather tortured methodology is employed to conceal the true default rates.  Initial payments are kept low, creating a situation akin to those infamous “balloon mortgages.”  Quite a bit of the bad paper is kept off the books through temporary “grace periods” and deferments.  Admitting a high rate of defaults would put colleges at risk of losing their federal financial aid.  And in just a few more years, at present rates of growth, the student loan market will be as big as the subprime mortgage market was, on the eve of the worst financial crisis since the Great Depression.  The default rate for student loans is actually a bit higher than the 20 percent rate that was incorrectly anticipated for subprime mortgages.

There’s one crucial difference between student loans and mortgages that might make the new debt crisis much worse than the previous one, as outlined by ZeroHedge in an earlier article:

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.

(Emphasis mine.)  Which, if I might add an obsidian lining to ZeroHedge’s dark cloud, means that the temptation for big-spending politicians to simply erase some of this student loan debt with their Magic Deficit Pens will be enormous.  There are no tangible assets to dispose of, and recovery of the money from those poor “kids” (which in the Obama era covers people well into their thirties) will be like getting blood from a stone.  It’s all just numbers on paper, and we all know that a few hundred billion dollars of deficit spending should be no obstacle to a noble goal.  The beneficiaries will be sure to reward the generosity of liberal politicians with their votes, while those who speak up for fiscal responsibility and the shortchanged American taxpayer will be dismissed as sexist racist youth-hating curmudgeons.  Everyone will remember how the youth vote broke in 2012.  Why, if worst comes to worst, we can just ask the rich to “pay their fair share” and cough up some more dough to cover this vital investment in America’s future.

The higher education system has become an incredibly powerful pump for sucking away wealth and productivity.  What value do most of these degrees really bring?  How many people are working absurdly far beneath their nominal credentials, or sitting in unemployment lines with diplomas in their hands?  How much productivity is lost from a working lifetime thanks to protracted student adolescence, financed with a combination of crushing personal debt and taxpayer subsidies?  All while it becomes increasingly difficult to find good people for skilled trade work?  Easy loan money has led to grotesque tuition inflation, which in turn pays for a lot of remedial education to cover the deficiencies of public high school.  And the whole rotten system is sitting on top of a mighty loan bubble that appears to be bursting.  That’s another way of saying that we never really had the money to waste on all these foolish and trivial courses, many of which amount to little more than political indoctrination.

I realize that’s a harsh indictment of higher education, but it didn’t have to end like this.  College courses can certainly have plenty of value.  The problem is not that the institution is superfluous, but rather that it has become corrupt.  The end result is ridiculously over-priced, under-valued diplomas that tend to serve more as personal references than professional qualifications for job seekers.  Resumes for even entry-level jobs are only read if they come stapled to a college diploma.  Meanwhile, vital and honorable alternative career paths have become less socially acceptable, and the working lifespan of the average American has grown shorter – it’s an extended youth, followed by a short working career and a long retirement.  That’s not a sustainable trend, especially not when people are living longer, and fewer workers are expected to support each retiree.  In retrospect, the whole system will seem perfectly ridiculous… once the debris from the explosion of the student loan bubble stops falling.