Generational Dynamics Forum - New Site

Higgenbotham wrote: It would be my guess that many of these graduates are going bankrupt and defaulting on all their debt including the student loans, but I don't know that.

Again, what percentage of the total federally insured student debt has already defaulted ?

And since you brought it up, what percentage of the total student loan defaults are also part of a bankruptcy ?

Higgenbotham wrote: If someone doesn't pay their mortgage as agreed in the document, the lender can modify the agreement or foreclose. The modification is going to be within existing market conditions though and not dependent on income. Someone can go through foreclosure and not go bankrupt by choosing to remain timely with their other obligations. A long time ago, I used to buy foreclosures and in doing so had to read through many foreclosure case files at the courthouse. Sometimes bankruptcies were involved with those those but often times not.

Mortgage defaults are driven by mortgage contract terms ( or deed of trust terms ) and promissory note terms as well as the relevant state and federal contract statutes and real estate statutes and case law. Long standing law and practices that legislatures are reluctant to change.

Defaults on student loans guaranteed by the federal government are driven by the U.S. government statutes which have changed repeatedly and drastically over the last 10 year. The most drastic changes were after Obama, and Democratic super majorities in Congress, took power in 2009. To the degree contract law is involved, the contract terms were driven by federal law, contract terms required compliance with ever changing federal law, and the federal government is making the lenders whole, so there is no reason to reject free money ( and demand a default ) based on a contract dispute. Since 2009 all new federally insured student loans have been from the federal government and many of the pre-existing federally insured loans were involuntarily bought out by the federal government at principle value so the federal government could receive greater than 5 percent interest while paying less than 3 percent interest. The latter loan buy ups being a deficit reduction action, on paper, at the time the law was passed.

I looked at these student loan laws in detail at the end of 2010 because they impacted my son finishing college and going into the military on a delayed program. At that point in time many of the loan servicing contractors were not fully up to speed on the then recent changes to federal law. The colleges that serviced their own loans were in even worse shape on compliance.

The most striking thing about the newest student loan laws is they allow the ignorant and lazy to retroactively cure defaults, by retroactively eliminating/reducing required minimum monthly payments, without penalty for not taking timely action to cure the default. The cost of this delay is absorbed by the the U.S. tax payer, not the lender or the student. Having the minimum monthly loan payment indexed to student income ( after the student is out of college and working at minimum wage ) is also a huge deal.

Even if a former student defaults on their federally insured student loan they can not get out of it under bankruptcy, so the default does not become permanent via bankruptcy, and they can retroactively cure the default and resume making payments at a vastly lower monthly rate. At which point the loan is no longer in default on the U.S. governments books. Decades will pass before the loan can be forgiven due to low income, so it will continue to be carried on the books of the U.S. government as a performing loan during that period.


The point here is, that in my humble opinion, the sub-prime student loan crisis will take much longer to fully develop ( than the sub-prime real estate crisis), and once it does fully develop have much less impact, because existing federal laws, that have existed since the 2009/2010 U.S. Congress, delay and massively reduce the impact of ( by spreading the impact over many years ) a sub-prime student loan crisis will have. In addition the banks, and the banking system, have virtually no exposure to a sub-prime student loan crisis.

Reality Check wrote:

Higgenbotham wrote: It would be my guess that many of these graduates are going bankrupt and defaulting on all their debt including the student loans, but I don't know that.

Again, what percentage of the total federally insured student debt has already defaulted ?

And since you brought it up, what percentage of the total student loan defaults are also part of a bankruptcy ?

It depends on the two points from which it is measured and how a default is defined. The figures I have read are somewhere around 9% as measured within 2 years from 2009 graduation, and somewhere around 13% as measured within 3 years from 2009 graduation. In the case of these figures, a default is defined as nonpayment anywhere from 270 days to one year.

I don't believe these figures on bankruptcy are available but, as mentioned, what I am hearing from people who deal with such matters is that bankruptcy together with student loan default is becoming a preferred solution for many recent graduates.

Reality Check wrote:Even if a former student defaults on their federally insured student loan they can not get out of it under bankruptcy, so the default does not become permanent via bankruptcy, and they can retroactively cure the default and resume making payments at a vastly lower monthly rate. At which point the loan is no longer in default on the U.S. governments books. Decades will pass before the loan can be forgiven due to low income, so it will continue to be carried on the books of the U.S. government as a performing loan during that period.

That makes sense. Looking around at some bankruptcy attorney's web sites indicates this is the incentive for a person in default on a student loan to seek legal help and go through a Chapter 13 bankruptcy. This attorney warns that the bankruptcy only provides temporary relief from the student loan until the Chapter 13 is discharged. http://www.jacobymeyersbankruptcy.com/s ... an-default

Higgenbotham wrote: It depends on the two points from which it is measured and how a default is defined. The figures I have read are somewhere around 9% as measured within 2 years from 2009 graduation, and somewhere around 13% as measured within 3 years from 2009 graduation. In the case of these figures, a default is defined as nonpayment anywhere from 270 days to one year.

I don't believe these figures on bankruptcy are available but, as mentioned, what I am hearing from people who deal with such matters is that bankruptcy together with student loan default is becoming a preferred solution for many recent graduates. Again, as to why this is the case, I have no idea. According to this attorney's web site, a Chapter 13 bankruptcy will provide temporary relief by consolidating and reducing student loan payments:
http://www.jacobymeyersbankruptcy.com/s ... an-default

Interesting.

Chapter 13 bankruptcy payment plans are normally used by people with significant income as part of a planned financial strategy that could not be accomplished as part of a Chapter 7 bankruptcy liquidation.

As you pointed out the Federally insured Student Loan can not be avoided by bankruptcy, so the bankruptcy must be driven by another purpose.

With, or without, the bankruptcy, the student loan must be paid, however, the student loan laws do allow the minimum monthly payment to be indexed to income, and their is no requirement to be in default ( or in bankruptcy ) before such a reduction in student loan payment amount. The former student is required to actually request a reduction in minimum payment amount before it can happen. Seems likely that such a student loan default, overlapping a bankruptcy, was driven by ignorance, or the student was using all available cash flow to pay the squeaky wheel bill collectors, or the default was part of a financial plan that involved both the student loan default for a number of months before a bankruptcy filing.

One could imagine a Chapter 13 financial plan that included leaving the student loan payments high plus making up back payments missed during the default period (like with a more standard loan contract during a Chapter 13 plan), depriving the lower priority unsecured creditors any portion of the income paid on the student loan during the years the Chapter 13 payment plan was in place ( after the bankruptcy filing and before the bankruptcy discharge ). The student loan default could also be an unplanned "error in judgement" that is coincidental with a bankruptcy filling.

In any case, once the new student loan payment plan based on the former student's income was worked out with the student loan lender, as the lender is required to do by federal law upon request by the former student, the student loan would no longer be in default.

After looking over the student loan default and Chapter 13 bankruptcy process, I would tend to be in agreement with you that student loan defaults will not be the "new subprime". Something that had flashed through my mind earlier, then forgot about as I was typing, is that subprime defaults went hand in hand with a spiraling down of real estate values, reducing net worths. Student loan payments have the same effect, sort of, because the monthly payment reduces the income of the individual and the resulting ability to build net worth, but I don't believe this reduction is on the same scale as a 30% reduction in home values nationwide across the board over a 3 year period.

I modified the post above a bit just as you were responding, but the meaning is the same.

Hard as it might be to believe, there is now more student loan debt than credit card debt. In total, it's over a trillion dollars being placed on the shoulders of the young generation. I've been astonished at how quickly tuition rates have skyrocketed. I talked to someone who graduated from a local college six years ago and he informed me that the cost has doubled since then.

After looking over the student loan default and Chapter 13 bankruptcy process, I would tend to be in agreement with you that student loan defaults will not be the "new subprime". Something that had flashed through my mind earlier, then forgot about as I was typing, is that subprime defaults went hand in hand with a spiraling down of real estate values, reducing net worths. Student loan payments have the same effect, sort of, because the monthly payment reduces the income of the individual and the resulting ability to build net worth, but I don't believe this reduction is on the same scale as a 30% reduction in home values nationwide across the board over a 3 year period.

I agree; I think there's an education bubble as well that's ready to pop. Already many young people graduating high school are deciding that college isn't worth the great expense and uncertain reward. Inability to get a job or go to school... that can be a lethal combination.

The official source for these numbers:
http://research.stlouisfed.org/fred2/series/TCMDO

http://www.zillow.com/blog/research/fil ... value1.pdf

Zillow has this estimate of total US home value gained and lost per year over the past 8 years. The total loss since the peak is about $6.4 trillion.

There would be many homeowners who are unaffected because they bought at prices that are still below current prices, and did not take out loans on the equity when prices rose after they bought.

There are some recent estimates of the total amount of negative equity in the US housing market at present. These estimates average to about $0.9 trillion.

During the second quarter, around 600,000 borrowers reached positive equity, bringing the year's total to around 1.3 million. Total negative equity fell to $689 billion from $691 billion in the first quarter.

Most underwater borrowers continued to make mortgage payments, with 84.9 percent remaining current on their payments in the second quarter, up slightly from 84.8 percent in the first quarter.

http://www.ibtimes.com/more-homeowners- ... gic-783001

According to the second quarter Zillow Negative Equity Report, 30.9 percent of U.S. homeowners with a mortgage are underwater (see Figure 1) – 15.3 million people – in the second quarter of 2012. Recent home value appreciation in many markets across the US has pushed negative equity levels down from 31.4 percent last quarter. However, negative equity is still slightly elevated from the 2011 Q2 percentage of 30. In total, underwater homeowners owe $1.15 trillion more than their homes’ worth.

http://www.zillow.com/blog/research/201 ... lue-gains/

In looking at the problem this way, a specific question can be posed. Which is the greater problem: About $1 trillion worth of negative equity on the backs of homeowners who are underwater on their mortgages of which about 15% are in default, or $1 trillion worth of student loans of which about 13% are in default on the 3 year basis? Viewed this way, the problems look similar. Though as stated previously default on a mortgage is not as reversible as default on a student loan, which can be retroactively and temporarily cured through the Chapter 13 bankruptcy process. The glaring deficiency in this comparison is the total value of mortgages represented by the $1 trillion in negative equity is more than $1 trillion, as well as being only a fraction of the total mortgage market. Therefore, while a resumption of the decline in real estate prices has the potential to cause a downward spiral, there is not that potential with student loans.

Now, we don't deny that if market forces had been allowed to work unhindered on occasion of the 2008 credit crisis, there would have been a painful deflation of the money supply and a severe economic downturn. Many big banks would have gone bust, instead of being allowed to continue to vegetate as zombies. However, this severe downturn would likely have been brief and have given way to a genuine recovery relatively quickly. Instead, the authorities essentially followed Duncan's recommendation: they bailed everyone out, inflated the money supply and went on a deficit spending spree. They even invested in 'green energy', with predictable results (see Solyndra as a pertinent example). This has ensured that the 'recovery' is a sham – the moment the artificial support by inflation and deficit spending is lessened even a little bit, corrective forces will immediately take over again. We have essentially exchanged 'short term pain and long term gain' for 'short term pain avoidance and long term misery'.

Now what will happen if these policies continue unabated? At some point, market forces will intervene anyway. If one continues to inflate at every sign of an economic downturn, one will eventually end up with the complete destruction of the underlying currency system. Likewise, governments can not hope to spend without limit. They will either face a market revolt at some point and become unable to roll over their debt (as has happened with several euro area member nations), or they will have to risk destruction of the currency by printing the money to buy their debt (the path the US, UK and Japan are currently on). But there is no way of avoiding the eventual catastrophe – the later it comes, the more profound and all-encompassing it will be.

http://www.acting-man.com/?p=16451

This happens to be my view - that there was a window of opportunity in 2002 and 2008 to do the right thing and it was missed. My view is not really based on Austrian economics though. It's based on a confluence of factors. One that's easy to understand is demographics. We have in the US the peak birth rate at about 1957 to 1961. Peak productivity occurs somewhere around the age of 43. By delaying the collapse, the older this large group of people is, the less ability they will have to lead the country out of it.

http://www.newyorkfed.org/research/nati ... Q22012.pdf

There is a wealth of information on all types of U.S. household debt for the period 2003 through 2012 ( June 30th ), by Quarter, contained in the linked report.

Mortgage Debt, Student Loan Debt, Credit Card Debt, Car Loan Debt, Mortgage Backed Revolving Lines of Credit, and Other types of debt are presented on a quarter by quarter basis for the period Q1 2003 through Q2 2012. Delinquency rates on all the above as well as trends.

One example of the information is that all types of Household Debt decreased by a net of 1,300 Billion between 2008 and 2012, but student loan debt increased by 300 Billion while all other types decreased by 1,600 Billion, during that same period.

About 1 Trillion of this decrease was in Mortgage backed debt reductions, but it is unclear, from this report alone, what portion of that decrease was from debt being written off the books due to foreclosures after mortgage defaults.

http://www.newyorkfed.org/research/nati ... Q22012.pdf

http://www.newyorkfed.org/householdcredit/

The linked graph decomposes the reduction in household mortgage debt over the period of 2009, 2010 and 2011.

Hovering your pointer over the filled in red area of the graph indicates the reduction due to write downs after foreclosure and hovering over the points on the black line will display total net reduction, from all increases and decreases in mortgage debt, for the same year.

While the total household mortgage debt decreased by 968 Billion during the period 2009 through 2011;

It appears from analyzing the graph that 99%, or 962 Billion, of that net decrease in total household mortgage debt was from mortgage debt write downs after foreclosures .

This appears to differ from the written description, included in the same link before the graph. That description of the decline implies that a substantial voluntary net reduction in mortgage backed debt occurred during 2009, 2010 and 2011 as a result of voluntary pay downs; but neither the numbers in the attached hover over graph, nor the numbers in the PDF linked report further below, appear to support that written description.

http://www.newyorkfed.org/householdcredit/

http://www.newyorkfed.org/research/nati ... Q22012.pdf