Submitted by Tyler Durden on 08/07/2015 11:25 -0400
A few months back, we called the government’s Income Based Repayment plans, or IBR, “the student loan bubble’s dirty little secret.” As the name implies, the idea with IBR is that monthly student debt service payments are based on the borrower’s disposable income. The less money one makes, the less one has to pay. Each monthly installment under the program counts as a “qualifying payment”, and after 300 of these, the balance of the loan (assuming it’s not paid off after 25 years), is forgiven. Perhaps the most interesting thing about this scheme is that it allows for “payments” of zero. Here’s what we said back in April:
After 300 “qualifying monthly payments” — so after 25 years of payments — any remaining balance is forgiven and legally discharged. The interesting thing about this is that if the calculated payment is zero, it still counts as a “qualifying monthly payment.” That is, if, based on the borrower’s financial situation, he/she is not required to make an actual cash payment for a period, that period still counts towards the 300 “payments” needed to have the balance of the debt discharged, meaning that in the end, borrowers could end up paying substantially less than principal (taxpayers eat the balance) and are effectively allowed to remain in a perpetual state of default while avoiding actual payment default along the way.
Needless to say, when borrowers elect to enter an IBR plan, the payment streams from their loans become far more unpredictable, which is why suddenly, Moody’s and Fitch can’t figure out how to rate student loan-backed paper. The best (and most hilariously absurd) idea yet comes from Citi, who suggested last month that Moody’s should consider scrapping the whole idea of loan maturity, because after all, one can’t really default on a loan with an indeterminate maturity date so if you just amend the bond indentures and extend the legal maturity date to infinity, you don’t have to downgrade the ABS.
