It is reported that of the $450 billion in student loans, 1/4 of student loans are being repaid through income-based repayment plans.
In a popular federal student loan program, 1/4 of student loans are being repaid through looser repayment plans to help borrowers avoid default, according to Morningstar DBRS.
Income-based repayment plans accounted for 24.7% of the $452 billion in student loans in the fourth quarter of 2019, up from 21.8% in the same period last year, Morningstar DBRS said in a report released on Friday.
In 2009, in the wake of the global financial crisis, the Obama administration offered income-based repayment (IBR) options to student borrowers under the Federal Family Education loan (FFELP) program. As a result of the global financial crisis, credit dried up and millions of Americans were in foreclosure.
The US government has implemented the FFELP program since 1965, which guarantees nearly 99 per cent of all maturing principal and interest on loans issued under the plan. The Obama administration ended the FFELP program in 2010, essentially excluding private lenders.
But the Obama administration's federal loan repayment program limits loan repayment to 10% to 15% of the disposable income of eligible borrowers and waives the outstanding balance 20 to 25 years later. For students with lower incomes, this may mean almost no monthly payments, but will not cause borrowers to default or damage their creditworthiness.
The plan was originally expected to reduce monthly repayments for more than 1.6 million student loan borrowers, although it does not provide students with a way to refinance their debt and locks interest rates at historically low levels.
The chart below shows that income-based repayment has become increasingly popular since 2011.
Student debt has quickly become the second-largest source of household debt in the United States after mortgages, according to the Federal Reserve Bank of New York (Federal Reserve Bank of New York), which set total student loans at just $760 billion in the first quarter of 2010, about half of the current total.
The Federal Reserve Bank of New York said 11.1 per cent of student loans defaulted or seriously defaulted (more than 90 days overdue) in the fourth quarter of last year, but warned that given that about half of student loans are some form of extension, grace or deferred repayment, and excluding "repayments", the actual amount of loans is likely to be twice that number.
Analysts led by Jonathan Riber wrote in the report: "Morningstar DBRS expects the combined utilization of deferred repayments and IBR to remain high for a foreseeable period of time."