Meet IBR, The Student Loan Bubble's Dirty Secret

Tyler Durden's picture

A little over a week ago we asked: “Is The Student Debt Bubble About To Witness Its 2007 Moment?” We were prompted by Moody’s decision to place 14 student loan-backed ABS tranches on review for downgrade as the ratings agency cited the very real possibility that the tranches wouldn’t fully pay down by their maturity date. In other words, some $3 billion in student loan-backed paper is now at risk of default. As a reminder, here’s an excerpt from the rationale:

Voluntary prepayment rates in FFELP loan pools remain historically low as a result of sluggish economic growth and high unemployment rates among recent graduates… Deferment and forbearance levels remain high throughout the life of the collateral pools, although they recently declined slightly from peak levels in 2009-11... The growing popularity of IBR, which extends the life of the loans to up to 25 years from the standard 10-year term of non-consolidation loans, and the extended repayment option (for borrowers with balances of more than $30,000) is further lengthening the weighted-average life of the student loan collateral pools. In some pools, loans in IBR and extended repayment represented 10%-12% of the balance of loans in repayment.

As a reminder, “IBR” stands for Income Based Repayment and, as the name suggests, simply means that payments on federal student loans are calculated based on how much the borrower earns. Here’s how Fedloan Servicing (a Department of Education approved servicer), describes the program:

Under this plan, your monthly payments are based on your adjusted gross income and family size. If you're married and file a joint federal income tax return, your spouse's adjusted gross income, and eligible student loan debt, if applicable, is also taken into consideration.

And here is how the organization describes a typical IBR-eligible borrower:

I have little or no income and mounds of student loan debt, so I'm stressed about my monthly payments.

Now consider the following information about monthly payments:

They are based on your adjusted gross income (individually or with your spouse, as applicable), your family size, and your state of residence.


They may be less than the interest that accrues each month.


They may be as low as $0.00.

Note that last point — “may be as low as zero.” In other words, depending on your financial situation, you may not have to make monthly payments at all.

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. 

This of course led us to wonder just what percentage of the government’s student loan portfolio was comprised of borrowers who are now in IBR. Here’s BofAML:

With respect to Income Based Repayment (IBR) and extended repayment programs, the Department of Education’s most recent data shows that the percent of FDLP borrowers in repayment opting for IBR or PAYE increased from 10% on June 30, 2013 to 13% on December 31, 2014, and the related balances increased from 14% to 24%. 

So in terms of dollar value, nearly a quarter of FDLP loans are on an IBR or PAYE (which is a similar scheme and stands for “Pay As You Earn”) program while 13% of all borrowers have opted into some manner of income-based payment plan. 

We, along with the St. Louis Fed, have argued that stripping out loans in forbearance or deferment from the delinquency calculations paints a clearer picture of where things actually stand because while you can argue about how those loans should be classified, what you cannot do is count those loans in the denominator but not in the numerator when calculating delinquency rates because if you do, you're effecitvely ensuring that you will understate the true percentage of borrowers who are behind. As we’ve seen, the delinquency rate for borrowers in repayment is somewhere around 30%. 

That said, if those who are enrolled in an IBR or PAYE program but whose financial circumstances are such that their calculated payments are zero are counted as both "in repayment" and as "current" (which seems likely), then even the 30% figure is likely a woeful misrepresentation of the actual delinquency rate, because those borrowers are being counted towards the total number of loans in repayment (the denominator) but not towards the total number of delinquencies (the numerator). Put differently: it seems rather strange to count someone as “current” just because their income-adjusted payment happens to be zero.

In short, borrowers making no payments by virtue of their financial situation are really no dfferent than borrowers in forbearance or deferment so why count them as though they are? They should also be stripped out of the "in repayment" delinquency equation and if they aren't (i.e. if you want to count them as being "in repayment"), then you also have to count them as being delinquent, because they are.  

*  *  *

We'll close with a few charts from BofAML which show that for the 2009 cohort, things are looking particularly grim:

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
XqWretch's picture

"When I was in my 20's and took out college loans, I paid them back in full! Damn Millenials! They are so lazy!" -Some idiot Baby Boomer who voted in LBJ, Nixon, Carter, Clinton and subsequently allowed this country to be ruined and all the jobs to be shipped overseas or be H1B'd

CH1's picture

The core problem is simple: People obey their oppressors.

NoDebt's picture

This shit is all getting written off someday.  I just didn't realize a lot of it already has, apparently.  

Gusher's picture

Who is being oppressed? I know a 48 year old who owes 50K in student loans and has never made a payment.  I suppose her credit is dinged. She makes good money. Kids in private school.  I don't think she feels oppressed.

Pool Shark's picture



Perpetual default and eventual forgiveness, hmmmmm,... Interesting..

Does Greece know about this program?

maxamus's picture

The ones that forced them to get some liberal arts degree at an expensive college?

Luckhasit's picture

i know that 24% of degrees aren't in bullshit, engineers and scientists. 

when engineers and scientists are looking for a job, then it's serious.

MansaMusa's picture

No it's just simple supply vs demand.  Too many scientists and engineers means their skill set us not needed at the time. 

Unfortunately,  "Would you like fries with that?" will start becoming common. 

Korea98's picture

It gets worse.  I worked in a college until recently and decided to check out the government's new debt payment program.  Basically you have to make payments based on a percentage of your income/family size that is over the poverty level.  If you are at poverty level or below, you pay nothing.  On top of that, if you work for the government, you only have to make payments for 10 years, not 20 or 25 like people in the real world.  This will end badly.

americanreality's picture

You should change your username.  People might think your asian. 

Korea98's picture

It gets worse.  I worked in a college until recently and decided to check out the government's new debt payment program.  Basically you have to make payments based on a percentage of your income/family size that is over the poverty level.  If you are at poverty level or below, you pay nothing.  On top of that, if you work for the government, you only have to make payments for 10 years, not 20 or 25 like people in the real world.  This will end badly.

Stevious's picture

XqWretch, when I was in my 20's I paid for the entire year of community college by simply working ove the summer and earned enough as an unskilled laborer to pay all tuition, all fees and a shared apartment to the next summer.

Therein lies the rub.  If prices overall are up x %, the cost of education, just like the cost of medical is up x times 2 or more.

Everyone talks about the problem but I have yet to see one article as to WHY college now costs so much.  When I was 20 all professors were tenured or on tenure track.  Today most I see are part-timers making squat.  Is it simply the billion dollar campus environment that is so common?

Amish Hacker's picture

So after 25 years of making a monthly payment of zero dollars, I'll owe zero because the rest of that college loan will be forgiven as a reward for making 25 years of payments. Of zero.

Now I get it.

JBilyj's picture

It's more like a common core math problem...

glenlloyd's picture

That might actually be an understatement...but I'm not's very close.

RaceToTheBottom's picture

Whether you like it or not, it is the same math that came to the conclusion that rewarding the Financial companies for causing this crash is the right thing to do....

licutis's picture

They do kick out a 1099 for the forgiven balance, with all the interest capitalized over all the years in IBR, so the IRS gets a big piece 

kaiserhoff's picture

This is important to individuals caught up in this mess, but we should remember the scale of the problem.

Three billion is barely a rounding error in the shit storm of national debt.

BrosephStiglitz's picture

This is important to individuals caught up in this mess, but we should remember the scale of the problem.

^Said some guy after the ArchDuke Franz Ferdinand's assassination.  Sarejevo,  29 June 1914. 

knukles's picture

Goddammit!  Just when I was gettin' all riled up about something "big".
OK ..... back to Broadcasitfy to listen to Baltimore burn.
Say good night Knukies
Nite Knuks!

americanreality's picture

You are a useless piece of shit.  An arrogant idiot.  The worst. 

i_call_you_my_base's picture

Earning no money for 25 years to get some debt forgiveness isn't a particularly good financial strategy, but I'm sure someone will try it.

Amish Hacker's picture

Lots of people will do it without even trying.

HenryHall's picture

If you emigrate you get to exclude the first $99k of foreign earnings from AGI adjusted gross USA income.

So if you are young and have a big student debt then there is a huge incentive to emigrate from the USA.

And it helps balance immigration to some extent!

Not only that, Europeans get 5 or 6 weeks vacation each year and cheap package holidays to Spain and Greece.

americanreality's picture

Not to mention Europe doesn't strap a yolk on its kids as they try to improve themselves.  Burn this disaster of a country down. 

EscapingProgress's picture

I found out about this yesterday, in fact. What a coincidence that this article has been posted today. I'm applying for IBR as we speak and moving out of the country at year end.

I've been diligently making monthly student loan payments above the minimum for the last two years. I feel like such an idiot.

youngman's picture

Who says they have to tell the truth..or that the government will check them out ...this is a wink wink to get votes baby

XqWretch's picture

That is why you work under the table. No taxes, no social security robbery, you can get that welfare, and you dont have to pay off student loans. If youre not gaming the system, the system is gaming you.

GotGalt's picture

It's called working under the table.  More and more people are doing it, especially the younger folks.

mtl4's picture

Aren't those just called academics?

BlindMonkey's picture

Fuck.  Get this over with already.  Based on all the doom porn indicators, Jesus is hitting the streets in October.  Get ready Bitchez!!

eucalyptus's picture

I'm taking advantage of it right now. I put the ZERO in zero hedge.



all-priced-in's picture

So just stay in college for 300 months - take out maximum loans to pay for living expenses & spring break vacation - and own nothing at the end of 25 years of keg parties and horny college girls.


Plus at the end you will have at least a BA in liberal studies - maybe even a BS is Art history or if you are a real go getter maybe a degree in geology or English literature. 




knukles's picture

Fuck's wrong with PhysEd with a concentration in bowling?

Amish Hacker's picture

Honolulu U, Knuks. Surfing major. Twenty-five years of free sunscreen and string bikinis.

americanreality's picture

I thought you said you were leaving.  Go to bed "knukie".  Dipshit.

-.-'s picture

¡No alimente los troles! 

Por favor.

Axenolith's picture

Shit, if I'da known that, I'da borrowed to get my geology degree ;-)

Though I would have to figure out how to not make 90K/year while getting to be outside 90% of the time...


My education forced me into bankruptcy too. Frankly, I made tons of payments but could not ultimately keep the work coming in at the same pace in winter. ERGO I ended up crunching the numbers and they did not add up whatsoever which resulted in my bankruptcy. Once I was discharged from bankruptcy I received a notice from the Trustee in Bankruptcy that stated I was now formally the "discharged bankrupt".


NOTE TO BANKS WORLDWIDE: Welcome to the club.

Budnacho's picture

Common Core Math strikes again...

buzzsaw99's picture

don't worry about the bankers, they get way moar gubbermint guaranteed profits than the students ever will.

jtz5's picture

While I certainly don't sympathize with the banks, something really irks me with people freeloading, gaming the system and not paying their bills.

I absolutely hate the banks get bailed out, with taxpayers always on the hook. I am so conflicted because people not paying bills goes against common law and good moral judgment.

Somehow, I have 60k credit limit on two credit cards. Part of me wants to go batshit and say fuck it like everyone else. When are those of us who do right rewarded?

Skateboarder's picture

The game goes on and on. Rewards are not immediate but gradual. The final reward is the ability to opt out from participation. I hear they serve you beer when you get to do that, and you can chill out and watch from the sidelines.

stormsailor's picture

virtue  is it's own reward, and in the immortal words of droopy dog, "cheaters never prosper"

NOZZLE's picture

Whoever downarrowed wretch is a Millenial ass sucking ObangoTard.

The idea that you would classify a borrower who is not repaying on contact terms as current is the sanctioning of fraud and would have meant Pen Time 60 years ago.

venturen's picture

if you work for charity or school they also forgive the loan. Basically if you are a liberal you just don't pay it back.