The Government’s Message For Heavily Indebted Students: Don’t Pay Us Back

Over the course of several years, we’ve chronicled virtually all aspects of America’s $1.3 trillion student loan bubble. 

We’ve discussed, for instance, the Treasury’s projections of a $3.3 trillion student debt nightmare by 2025. We’ve also outlined why the official data on delinquencies almost assuredly understates the case. The numbers you see, have been adjusted twice. Instead of taking the number of delinquent borrowers over the number of borrowers in repayment, the official figures instead report the number of delinquent borrowers over total borrowers, even those in deferment and forbearance, which ensures the delinquency ratio will be far lower than it would otherwise be. But that’s not all. Borrowers making no monthly payments due to their enrollment in the  government’s Income Based Repayment program are not counted as delinquent because in a society built on debt, a “payment” of $0 counts as a “qualified payment” towards the 300 monthly installments needed for the government to “forgive” the balance of the loan. The delinquency data has effectively been “Liesman’d”. 

Moody’s (when they aren’t busy sparking bank runs) has warned that the proliferation of $0 Income Based Repayment plans threatens to plunge billions in student loan-backed ABS into default and based on the following official Department of Education letter that’s sent to students coming off of the 6-month post-graduation grace period, we can see why the ratings agency is concerned because as you can see, the government can’t wait to tell students how they can avoid repaying their debt.

Dear XXX,

Your loan servicer, Great Lakes Educational Loan Services, Inc., has contacted you or will be contacting you soon about your repayment options for your federal student loan. As you consider these options, the U.S. Department of Education wants to remind you that you may qualify for a repayment plan that calculates your monthly payment based on your income.

You will likely qualify for an income-driven repayment plan if your total federal student loan debt exceeds your annual income. Under an income-driven plan, your initial payment could be as low as $0 per month.

When you make payments based on your income, your loans are paid off over a longer period of time than the standard 10-year plan. While this reduces your monthly payment amount, it also increases the total amount you pay over time. But if you work for the government or a not-for-profit employer, you may qualify to have your remaining loan balance forgiven after 10 years of payments under the Public Service Loan Forgiveness Program.

We encourage you to use our repayment estimator to estimate your monthly payments under our income-driven plans and see if you might qualify. Your loan servicer can also help you better understand your repayment options.

Thank you,

U.S. Department of Education

We’ll leave you with the open letter we penned to the Class of 2015 earlier this month:

Dear Class of 2015, 

Because we recognize your plight, allow us to provide you with a bit of friendly advice as it realtes to your student loans. Once you are uncerimoniously thrown from your dorm into the less-than robust US jobs market, you will likely discover that contrary to what you were told in your economics courses, the US economy is but a shadow of its former self. Because you probably didn’t study to become a petroleum engineer, you will likely find your student debt burden to be quite onerous. The key to having it discharged is to make just enough money to stay clear of bankruptcy, but not enough to really survive above the poverty line. This is because it’s hard to have student debt discharged in the event you go completely broke. However, if your discretionary income is so small as to render you incapable of making payments, the government will start you on a program whereby a monthly payment of zero dollars counts towards the 300 “payments” you need to make to have your debt forgiven. Toe this line carefully (i.e. don’t slip up and start making too much discretionary income) and the entirety of your student debt will be forgiven in 25 short years without your ever having to pay a dime.

You’re welcome,

Zero Hedge