The trend “is materially suppressing repayment rates, in part because many borrowers’ IDR payments fall below monthly interest accruals, resulting in growing loan balances even as borrowers make required payments.” More than half of the balances of borrowers who owe more than $200,000 are in IDR programs, while only 5% of those who owe less than $5,000 are covered by IDR, Moody’s said.
The fact that borrowers — and especially those who owe six figures — can pay less than the interest rate on their loans, in turn, directly impacts holders of student-loan asset backed securities, a constituency of Moody’s. The Wall Street Journal published an article earlier this month about this very issue, with the headline “A Borrower Will Be 114 When Bonds Backed by Her Student Loans Mature.”
The whole thing is a bit of a mess. To summarize, it starts with Julie Chinnock, a 50-year-old who owed about $250,000 in student loans. She entered into an IDR program, like her peers, and bonds backed in part by her payments were on the verge of a downgrade by Moody’s, which in 2015 altered its methodology to factor in slower repayments. The issuer of the asset-backed securities and the investors who owned them agreed to extend the maturity dates by decades to keep their top ratings.
The Consumer Financial Protection Bureau has become involved in recent years, concerned that issuers of “SLABS” might mislead student-loan borrowers because of their incentive to prop up credit ratings.
All of this is to say, the student-loan crisis is far more intricate than an upward sloping, seemingly unstoppable linear line. The aggregate figure is staggering, to be sure, especially considering what it was just a decade ago. And it’s troubling that a wide swath of the U.S. population can’t dig out from under its debt load. But consider the following:
The inflation-adjusted cost of obtaining an undergraduate degree is now mostly holding steady relative to household income. So while it’s true that higher education costs skyrocketed over the past few decades, the same doesn’t quite hold up when focusing on recent years.
As previously mentioned, fewer young Americans are heading to for-profit and two-year institutions, where it might be tougher to land a job that pays enough to wipe out student loans.
To top it off, many borrowers are intentionally slowing down their repayment speed, often to the point that their outstanding balance grows even after making qualifying payments.
Taken together, it’s hard to make the case that the proliferation of student loans is getting appreciably worse. Rather, the debt appears to be predominantly a burden of those who went to school during the period in which college prices were rising sharply relative to inflation and when the lingering economic consequences of student loans were less well-known. With those borrowers now nearing their prime earning years, it’s little wonder why debt-forgiveness plans are alluring public-policy proposals.
This opinion piece was provided by Bloomberg News.