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.