BREAKING BAD (DEBT) – EPISODE THREE
by Jim Quinn, The Burning Platform
In Part One of this three part article I laid out the groundwork of how the Federal Reserve is responsible for the excessive level of debt in our society and how it has warped the thinking of the American people, while creating a tremendous level of mal-investment. In Part Two I focused on the Federal Reserve/Federal Government scheme to artificially boost the economy through the issuance of subprime debt to create a false auto boom. In this final episode, I’ll address the disastrous student loan debacle and the dreadful global implications of $200 trillion of debt destroying the lives of citizens around the world.
Getting a PhD in Subprime Debt
“When easy money stopped, buyers couldn’t sell. They couldn’t refinance. First sales slowed, then prices started falling and then the housing bubble burst. Housing prices crashed. We know the rest of the story. We are still mired in the consequences. Can someone please explain to me how what is happening in higher education is any different?This bubble is going to burst.” – Mark Cuban
Now we get to the subprimiest of subprime debt – student loans. Student loans are not officially classified as subprime debt, but let’s compare borrowers. A subprime borrower has a FICO score of 660 or below, has defaulted on previous obligations, and has limited ability to meet monthly living expenses. A student loan borrower doesn’t have a credit score because they have no credit, have no job with which to pay back the loan, and have no ability other than the loan proceeds to meet their monthly living expenses. And in today’s job environment, they are more likely to land a waiter job at TGI Fridays than a job in their major. These loans are nothing more than deep subprime loans made to young people who have little chance of every paying them off, with hundreds of billions in losses being borne by the ever shrinking number of working taxpaying Americans.
Student loan debt stood at $660 billion when Obama was sworn into office in 2009. The official reported default rate was 7.9%. Obama and his administration took complete control of the student loan market shortly after his inauguration. They have since handed out a staggering $500 billion of new loans (a 76% increase), and the official reported default rate has soared by 43% to 11.3%. Of course, the true default rate is much higher. The level of mal-investment and utter stupidity is astounding, even for the Federal government. Just some basic unequivocal facts can prove my case.
There were 1.67 million Class of 2014 students who took the SAT. Only 42.6% of those students met the minimum threshold of predicted success in college (a B minus average). That amounts to 711,000 high school seniors intellectually capable of succeeding in college. This level has been consistent for years. So over the last five years only 3.5 million high school seniors should have entered college based on their intellectual ability to succeed. Instead, undergraduate college enrollment stands at 19.5 million. Colleges in the U.S. are admitting approximately 4.5 million more students per year than are capable of earning a degree. This waste of time and money can be laid at the feet of the Federal government. Obama and his minions believe everyone deserves a college degree, even if they aren’t intellectually capable of earning it, because it’s only fair. No teenager left behind, without un-payable debt.
According to National Center for Educational Statistics, colleges and universities will award 1 million associate’s degrees and 1.8 million bachelor’s degrees in 2014-2015. So they are admitting more than 5 million in the front end, with only 2.8 million ever earning a degree. That means almost 50% never graduate, confirming the SAT predictive results. Then there is the fact an associate’s degree and most of the liberal arts degrees awarded qualify the graduate for a fry cook job at Burger King. What is even more fascinating in this episode of absurdity is the fact undergraduate enrollment has fallen by 930,000 in the last two years and stands only 700,000 higher than when Obama took office. A critical thinking person might ask how student loan debt could grow by $500 billion when college enrollment only grew by 700,000. That is $711,000 per additional student in college. Something doesn’t add up.
The Federal government couldn’t possibly have doled out $500 billion to anyone with a pulse as a way to manipulate the national unemployment rate lower, because anyone in school is not considered unemployed. Do you think the $500 billion was spent on tuition and books? Or do you think those “students” used it to for hookers, blow, booze, iGadgets, HDTVs, online poker, weed, fantasy football entry fees, and Linkedin stock? – Whatever it takes to boost GDP. With default rates already at all-time highs and accelerating skyward, with $131 billion of loans already in serious delinquency, you don’t need a PhD from the University of Phoenix (where default rates exceed 30%) like Shaq to realize the American taxpayer is going to get it good and hard once again.
It seems the for-profit diploma mills and community colleges account for a huge percentage of loan defaults. They are nothing but bottom feeders in a feeding frenzy of Federal loans. The five schools in the country with the highest level of defaulters from 2011 through 2014 are as follows:
- University of Phoenix – 45,123
- ITT Technical Institute – 11,260
- Kaplan University – 10,684
- DeVry University – 9,081
- Ivy Tech Community College – 7,237
These institutions of lower learning spend more annually on marketing than Ivy League business schools generate in total revenue. They are nothing more than swindlers, gaming the Federal loan system, and dispensing virtually worthless diplomas, and leaving its students deep in debt. The true consequence of providing easy money to people who shouldn’t be in college has been to drive up tuition rates at all colleges and universities. Without this $500 billion infusion of illusion, demand would drop, the diploma mills would go out of business, and legitimate institutions would have to lower tuition rates to attract students. But that’s not how Obama and his administration roll.
The biggest scam is the reported default rate disseminated by the Fed and regurgitated by the mainstream media. There are over 7 million borrowers in default on a federal or private student loan. Roughly a third of Federal Direct Loan Program borrowers have been forced into choosing alternative repayment plans to lower their payments. The reported 11.3% delinquency rate is based on total student loans outstanding. In reality 50% of the loan balances are held by students still in school, in their grace period, in deference, or in forbearance. They haven’t been required to make a payment yet. Of course the loans in deference or forbearance due to unemployment or economic hardship are essentially an allowable delinquency. The true delinquency rate on loans in the repayment cycle is 23%. This strongly implies that taxpayers will be on the hook for at least $250 billion of losses.
The long term impact on borrowers is also dire. Student loan debt cannot be extinguished in bankruptcy. It will follow them throughout their lives. Defaulting on a federal student loan has serious consequences. Unlike other consumer credit, borrowers in default on a federal student loan might see their tax refund taken and their wages garnished without a court order. The impact on their credit rating will keep them from buying a home. The pure volume of student loan debt is currently restricting household formation, first time home buyers, marriages, and consumer spending. The unintended negative consequences of issuing hundreds of billions in bad debt have far outweighed the ephemeral short term fake benefits. But short-term appearances are all that matter to the ruling class.