Students Loan Default Rate Worst in 20 Years, Tops $146 Billion.

In a report released yesterday (presumably before the shutdown went through), the U.S. Department of Education revealed that the default rate on student loan debt is the worst it’s been in nearly 20 years. As the report from states:

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.

To add further context: In their August quarterly report on household debt and credit, The New York Federal Reserve reported that the total outstanding value of student loans has risen to a $994 billion. (This number only accounts for federally subsidized student loans; with private student loans considered, the total is well over $1 trillion). This is an increase of $80 billion in the past year alone.

Applying the default rates to the total loan debt value mentioned above, we can calculate that the total value of loans in default is close to an astounding $146 billion.

In a piece of silly commentary, the U.S. Secretary of Education Arne Duncan had this to say:

“The growing number of students who have defaulted on their federal student loans is troubling… The Department will continue to work with institutions and borrowers to ensure that student debt is affordable.

They want to “ensure that student debt is affordable”? As Admiral Ackbar might say: “It’s a trap!”

Let us examine this using the Socractic Method. When people are spending far more money in a given market (student loans, housing, etc) than the market is actually worth, what does that produce? Think about it. Imagine inflating something with air…. That’s right, it produces a bubble. The student loan market is in full bubble mode. When the Department of Education says they want to “keep student debt affordable”, what does that mean? It means that they want to finaggle the system so that students can take on debt that they otherwise would not be able to afford. Remember the subprime mortgage crisis of 2008? Why did so many people default on their mortgages and lose their homes? Because they could not actually afford the debt. The only reason they were able to get the debt in the first place is because the federal government kept mortgages affordable. The Department of Education is doing the same thing with Student loans right now. They are setting students up for failure.

When the Department of Education “keeps student debt affordable”, what are they really doing to students who take up this debt? They are plunging them into a low-yield debt trap. This easy money leads to rising tuition rates; this leads students to take on even more debt; this leads many of those students to default; this leads to the government introducing even more measures to “keep debt affordable” as the market worsens, enticing even more students to take on unaffordable debt; and the vicious cycle continues until the inevitable “POP!”.

Moving on… in response to this terrible default rate, the Department of Education intends to pursue punishing sanctions against schools which have a 25% or higher loan default rate amongst graduates. As states:

Certain schools are subject to sanctions for having two-year default rates of 25 percent or more for three consecutive years, or over 40 percent for one year. As a result, these schools will face the loss of eligibility in federal student aid programs unless they bring successful appeals.

This is stupid. It is not the school’s fault that students are taking on too much debt. There are only two parties at fault: The student (for taking on more debt than they can afford), and the federal government (for providing easy money and trapping students into debt.) The only sanctions that should be going out are sanctions against the federal government for screwing  everyone over with their fantasy world monetary policies.

In closing, feast your eyes on this chart:

FRED Graph

This chart, from the Federal Reserve of St. Louis, shows the history of student loans in America. This is downright madness. This will not be able to continue.

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