Another Prick In the Student Loan Bubble: Obama Administration to Forgive Nearly 400K Debtors

This article was submitted by Addison Quale, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

On Tuesday, the Obama administration announced that the federal government will open the door to forgive nearly 400,000 student loans. According to a MarketWatch report, if every eligible debtor takes advantage of this pathway to forgiveness, it will total more than $7.7 billion:

The Department of Education will send letters to 387,000 people they’ve identified as being eligible for a total and permanent disability discharge, a designation that allows federal student loan borrowers who can’t work because of a disability to have their loans forgiven. The borrowers identified by the Department won’t have to go through the typical application process for receiving a disability discharge, which requires sending in documented proof of their disability. Instead, the borrower will simply have to sign and return the completed application enclosed in the letter.”

According to MarketWatch, about 179,000 of the borrowers eligible for discharge under the program are already in default.  A group of about 100,000 are at risk of having their tax refunds or Social Security checks garnished to pay off the debt.

It’s important to keep in mind this money doesn’t just disappear into thin air. The US taxpayer is ultimately on the hook for every forgiven dollar.

This forgiveness program is just one more step forward in the escalating student loan crisis taking place in this country, and it pales in comparison to the number of people who could potentially walk away from their student loans if a federal court decides to allow for the discharge of student loan debt through bankruptcy.

Student loan debt has skyrocketed since 2008, becoming a third pillar of massive debt overreach, along with home mortgages and car loans. This most recent Obama student loan forgiveness program hints at an ugly reality – a large chunk of this ballooning debt will likely never be repaid, adding to the financial chaos that is already brewing. Student loan debts have now reached 1.2 Trillion dollars, and as the WSJ recently reported, the quality of these loans and the likelihood of their repayment are dwindling sharply.

Following is a painful look at the student loan landscape in America.

More than 40% of Americans who borrowed from the government’s main student-loan program aren’t making payments or are behind on more than $200 billion owed, raising worries that millions of them may never repay.

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While most have since left school and joined the workforce, 43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1, according to a quarterly snapshot of the Education Department’s $1.2 trillion student-loan portfolio.

About 1 in 6 borrowers, or 3.6 million, were in default on $56 billion in student debt, meaning they had gone at least a year without making a payment. Three million more, owing roughly $66 billion, were at least a month behind.

Meanwhile, another three million owing almost $110 billion were in “forbearance” or “deferment,” meaning they had received permission to temporarily halt payments due to a financial emergency, such as unemployment. The figures exclude borrowers still in school and those with government-guaranteed private loans.

Navient Corp. , which services student loans and offers payment plans tied to income, says it attempts to reach each borrower on average 230 to 300 times—through letters, emails, calls and text messages—in the year leading up to his or her default. About 90% of those borrowers, which include federal borrowers as well as those who hold private loans, never respond, and more than half never make a single payment before they default, the company says.

There is so much dismal data here – it’s almost depressing. Obviously, the situation is deteriorating and we can expect an enormous number of defaults. That means a lot of people and institutions owning these loans are going to lose a lot of money.  Of course, a large chunk of this student loan debt is backed by the federal government. So ultimately, the American taxpayer is on the hook.

Mishtalk offers pretty solid analysis of the story and mentions deflation as one of the consequences. According to their analysis, students won’t move on to bigger and better things, but will instead move back home with mom and dad because of the burden of debt. In other words, the process of “household formation” will go into reverse. This is clearly deflationary.

Overall, it’s more of the same from our crony capitalist government and financial system. And it’s really not too dissimilar from the subprime mortgage crisis of 2008. Trillions of dollars in loans, made to people with suspect credit, who ultimately won’t be able to pay it all back, resulting in massive defaults and losses.

I finally got around to watching Big Short this past week. Anyone know how you can short these student loans?

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