While our federal government continues to chase many mortgage lenders for so-called "predatory lending" practices, perhaps we should check in on the situation of far and away the biggest predatory lender of all, the federal government itself. Its most odious practices are in the area of student loans. I find the term "predatory" a stretch when applied to a mortgage loan for a house, given that in the worst case the borrower got to live in the house, and even if he gets foreclosed and has a deficiency balance he can normally discharge that in bankruptcy. Not a pleasant process, but sometimes life can be tough. Compare that to federal student loans, where the government lends inexperienced 18 - 24 year-olds open-ended amounts, often for dubious and overpriced trade schools, and then flatly forbids discharge in bankruptcy. Many borrowers' finances are ruined for life, and they don't even have marketable job skills to show for it. Now that's predatory!
I first covered the student loan situation in November 2012. That's less than two and a half years ago. At the time total student loan debt outstanding had just hit $1 trillion, and the default rate reported by the Federal Reserve had just suddenly gone from 8.5% in Q2 2012 to 11% in Q3 2012. I also pointed out that close to half of the outstanding trillion were loans in deferment, grace period, or forbearance -- meaning that the actual default rate on loans in repayment status could be as high as 22%. And I asked: "Once the Federal credit card gets behind something, how far and fast can it blow up and explode?"
We are now seeing how fast this kind of pushing of "free" federal money can blow up and explode. Two articles in the Huffington Post (March 27, 2015 here and August 20, 2014 here) collect the data. First, the upward march of loans outstanding continues unabated, reaching $1.096 trillion as of June 30, 2014 (and undoubtedly well over $1.1 trillion today).
And how much of that will ever be paid back? You almost can't believe how fast this is going south. According to the August 2014 post (citing Education Department data as of June 30, 2014), the delinquency/default rate had reached 18%. Oh, but with another 34% in deferment, forbearance or bankruptcy, meaning that of those supposed to be repaying, almost 27% were in default. Then in late March 2015 the Department released a new set of numbers on the performance of its largest loan servicing contractors. The new data are not completely comparable to the prior data, omitting about a quarter of the universe, and counting as delinquent anyone more than 5 days behind on payment, while the old data required 30 days to be counted as delinquent. With that said, the new delinquency figure is 33%. 8.5% to 33% in barely two years!
And we haven't even gotten to the question of whether you can trust any number coming out of this crooked government. In the student loan area a big issue is how many borrowers pay nothing and yet still qualify for "current" payment status. How could that be possible? Because the government has so-called "income-based" repayment options. Show little or no income, and you qualify for a zero or near-zero monthly payment and yet you go in the "current" category. And how many of such people are there? Actually, they don't give out information on that. From the August 2014 article:
At a December Education Department conference in Las Vegas, Brian Lanham, then an executive at student loan giant Sallie Mae, said that more than 40 percent of borrowers who enroll in so-called income-driven repayment plans have a zero monthly payment. It's "something that's really boosted our income-driven repayment application rates," Lanham said, according to a recording of the event the department posted on YouTube. "If they're struggling," he said of borrowers, "it's an option." The Education Department did not respond to inquiries regarding the number of borrowers enrolled in plans that require them to pay nothing to keep current on their loans.
In other words, a very large percentage of those counted as "current" are actually paying nothing. But they won't say exactly how many. So if you add "supposedly 'current' but paying nothing" to the officially delinquent, what's the percent then? 40%? 50%? More? (By contrast, delinquency rates on normal consumer debt like credit cards and car loans tend to be around 6%.) In an April 2013 article I predicted that the government would be lucky to get back half of its trillion of student loan debt. Today, that "half" is looking wildly optimistic, and the trillion has grown another 10+%. Don't worry though -- none of this shows up on the federal balance sheet.
And those "supposedly 'current' but paying nothing" people have been put into a completely hopeless mess. If they actually try to get ahead, they'll just find the government sucking away all their increased income to pay the loans. How come I'm not reading about this outrage in the New York Times?