A hidden time bomb ticks away inside the government budget: Within a handful of years, US taxpayers will be on the hook for over $100 billion in student loan defaults.
Just last Friday, the US Department of Education released new data on student loan defaults. In short: The hissing sounds coming from the student loan bubble are getting louder.
I doubt it’s a coincidence the Department of Education chose last Friday (when attentions had shifted to the weekend) to release new three-year cohort default rate data for federal student loans. The three-year cohort default rate is defined as follows: the percentage of borrowers who enter repayment on certain loans during a particular federal fiscal year (Oct. 1-Sept. 30) and default or meet other specified conditions prior to the end of the second following fiscal year.
The default rate is horrendous, and it’s only going to get worse. These are uncollateralized loans, so losses given default will be orders of magnitude higher than losses on subprime mortgages; in subprime, losses were mitigated by the value of housing collateral.
“More than one in 10 borrowers defaulted on their federal student loans, intensifying concern about a generation hobbled by $1 trillion in debt and the role of colleges in jacking up costs,” a Bloomberg story notes. The story continues:
“The default rate, for the first three years that students are required to make payments, was 13.4%, with for-profit colleges reporting the worst results, the US Education Department said today.
“The Education Department has revamped the way it reports student loan defaults, which the government said had reached the highest level in 14 years. Previously, the agency reported the rate only for the first two years payments are required. Congress demanded a more comprehensive measure because of concern that colleges counsel students to defer payments to make default rates appear low.”
This 13.4% figure will surely go higher. The post-2008 surge in student loan volume won’t season and start defaulting until after the Class of 2013 graduates. Then we will see the real fireworks. This crisis will finally capture the public’s attention.
What are the investing implications of these defaults-in-waiting? An obvious conclusion is to avoid owning the for-profit education stocks, no matter how cheap they may appear. Education stocks including Apollo Group (APOL) and ITT Educational Services (ESI) probably face a surge in legal and regulatory risk once the enormous scale of student loan defaults comes to public attention next year. In fact, even after they’ve suffered large declines, the for-profit education stocks are starting to look like attractive short sales.
for The Daily Reckoning
Dan Amoss, CFA, is a student of the Austrian school of economics, a discipline that he uses to identify imbalances in specific sectors of the market. He tracks aggressive accounting and other red flags that the market typically misses. Amoss is a Maryland native, a graduate of Loyola University Maryland, and earned his CFA charter in 2005. In spring 2008, he recommended Lehman Brothers puts, advising readers to hold the position as the stock fell from $45 to $12.
Student loans cannot be discharged in bankruptcy court unless you can show undue hardship.
Watch how many minorities are granted this “undue hardship” due to the Community Activist we have as Presidente’
Are you kidding me? Student loan is one of the safest unsecured debts. It cannot be discharge, not even in bankruptcy. Sure, the debt holders will have a disruptive cash flow stream and he may incur legal costs when he wants to force the debtors to pay up, so there is a small loss. But the recovery rate is pretty high. Also, the FED and the lenders of this loan have all the time and resources to ride out the storm. That’s from an investor’s stand point. It’s a different story from the perspective of the debtor and it will take its toll on the economy. SO don’t sign anything you don’t understand.
Pingback: Join CPATrend()
Pingback: CPA Networks()
Pingback: Veja aqui()
Pingback: jungs mit sixpack()
Pingback: Calgary Roof replacement()
Pingback: Calgary SEO()
Pingback: Calgary SEO Consultant()
Pingback: Calgary SEO Outsourcing()
Pingback: bola berita sundul()
Pingback: berita-bola.org berita bola()
Pingback: berita bola terkini()
Pingback: books for 10 year old boys()
Pingback: ￼￼￼Order Bystrictin Online()
Pingback: Flipora By Infoaxe￼()
Pingback: Flipora Article()
Pingback: ppi claims letter()
Pingback: reviews on muscle factor x()
Pingback: Do you know where to buy silos in Italy?()
Pingback: how to build muscle()
Pingback: consulente del lavoro torino()
Pingback: quali sono i prezzi di mercato delle case prefabbricate?()
Pingback: Elettronica Cuneo()
Pingback: click here()
Pingback: I LOVE Myrtle Beach golf packages and hotels()
Pingback: riverbank fernvale()
Pingback: Peak Life Prostate()
Pingback: Subway Surfers - Play free Subway Surfers game online()
Pingback: true tech new blog()
Pingback: this site()
Pingback: Love Letters For Him()
Addison takes a look behind the curtain during a seminal moment in The Daily Reckoning’s history…
A study published in the most recent issue of The Journal of Neuroscience was sparked by researchers who wanted to find out why cocaine addicts so frequently relapse despite sincere attempts to recover from their addiction. Stephen Petranek has more…
While smaller microbrews might not be the best investment right now, I think the trend of better beer isn't going anywhere. And the bigger breweries are realizing they need to figure out how to compete in a market where tastes are clearly evolving.
We recently had a conversation with our friend Chuck Butler -- editor of the Daily Pfennig and Managing Director of Global Markets at EverBank. We discussed U.S. fundamentals… China… special drawing rights… emerging markets… and more!
Just when you thought the bond bull market was over... Jim Rickards gives his insight on what could cause a bond market rally.
…the grim reaper doesn't exactly make for a sexy sales pitch. Think about it. Why would a trader want to buy death care stocks when he could just as easily play the latest social media IPO? Nobody wants to talk about death. I can see you practically squirming in your chair right now just reading this.