Sunday, September 30, 2012

Subprime Student Loans & The Impact On The Economy

The US Department of Education released a report on Friday showing that the percentage of student loan borrowers who defaulted on their loans during the first three years after leaving school reached 13.4%.

Borrowers are considered in default when they miss payments for 270 days.

The size of the federal student loan market has reached $914 billion. What happens to the 13.4% of borrowers that have left school, found out there are no jobs available, and now have $120 billion of loans in default?

They enter debtor's prison because student loans cannot be discharged through bankruptcy.

This has become huge business for the collection agencies who were paid $1.4 billion just last year to hunt down these Americans. When found, almost like a scene out of the Hunger Games, they begin the process of wage garnishments and seizing tax refunds.

The story is obviously terrible for the defaulted students conned into the American dream higher education and debt enslavement, but what does it mean for the larger economy?

The total size of the student loan subprime market is rapidly closing in on $1.3 trillion, which was the size of the total real estate subprime market at its peak in 2007.

Some argue that this will have a similar impact that the housing market had on the economy as more and more of these loans continue to default.

This will not be the case because the federal government has either insured or back stopped almost 100% of the student loans currently in the system. It a simple write down on the balance sheet of the federal government, running at over $16 trillion in the red as of this writing.

While most Americans have not taken the time to look around and take notice, America is now essentially a communist country. Home mortgages, auto-loans, small business, and student loans are now provided or insured by the federal government. Loans provided from the private sector banking system, the too big too fail banks, are also back stopped by the federal government should these loans fail.

Well over 50% of the country now lives off government assistance through disability, social security, food stamps, etc.

The following chart shows the rise in those receiving disability and food stamps (+21 million) vs. those who have received a job (-1.6 million) since 2007. Why bother going through four years of college and accumulate the debt when you can just leave college and begin receiving a disability check with a food stamp card?

How does the coming hundreds of billions in student loan debt defaults impact the big picture? Very little. It is a drop in the bucket for the total disaster that makes up the US government debt bubble. It is just another junk of debt for the federal reserve to print and purchase as we move closer to the day where 100% of the economy is provided though the federal government, which is paid for by the Federal Reserve's printing press.

Sound drastic? Think about how different the country of America is today from September 2008.

To help put the $120 billion student loan write off in perspective, here is a quick run down of the staggering defense spending in the United States every year.