Some Bonds Tied to Student Loans Won't Mature Until the 2070s
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What is the headline issue about student-loan-linked bonds and extended maturities?
Here's your money briefing for Thursday, January 9th. I'm J.R. Whalen at The Wall Street Journal in New York. Americans have $1.5 trillion in student loan debt, a portion of which is held by investors who bought bonds backed by the loan payments. But borrowers are taking longer to pay off their loans, and as a result, some of the bonds won't come due until the 2050s and beyond. In some cases, the borrowers will be well over 100 years old by that point. So what does that mean for taxpayers who may have to foot the bill? We'll ask Wall Street Journal reporter Cesare Podcol. First, some money in market news you should know. Your chances of being audited by the IRS are the lowest they've been in about 10 years.
The IRS audited just four-tenths of a percent of all the personal income tax returns in 2019. The percentage of returns audited has been declining for eight straight years, and that's mostly due to cuts in the IRS budget. The service has lost almost 30,000 full-time positions since 2010, especially in enforcement and criminal investigation. It currently has about 78,000 workers, and though it has been adding staff over the past year, the IRS projects that roughly 30 percent of remaining workers will retire within the next five years.
For the millions of Americans holding a total of $1.5 trillion in student loan debt, being given a new payment plan that lowers their monthly bill can ease the financial burden. But that lower monthly bill means investors who are holding bonds backed by those loans may not see a payout for decades as the bond's maturity date is extended and those bond ratings face the possibility of downgrade. Wall Street Journal reporter Cesare Podkul is here with details. So, Cesare, let's go back to the lower monthly payments. In many cases, borrowers can pay less each month based on their income level?
Yeah, it was a program that was created by Congress and implemented in 2009. It's called income-based repayment. And what it meant was that students who were struggling to pay their loans because they were eating up a large chunk of their monthly income could get those monthly payments capped at 15% of their discretionary income.
How do income-driven repayment plans affect borrower monthly payments and loan timelines?
which meant that the loans would become more affordable to them on a monthly basis. But for this small chunk of the $1.5 trillion that's owned by investors, that meant that those bonds would not repay by those final maturity dates.
Now, can you explain how people invest in student loan debt?
Sure. So there was a program that was created in the 1960s called the Federal Family Education Loan Program. It no longer exists. It was terminated by Congress in 2010. But under that program, private lenders would originate federally guaranteed student loans that they would then package into securities and sell to investors.
How are old federal student loans packaged into bonds and who bought them?
So those are the bonds at question here. They primarily include older student loans because this program was terminated in 2010. And those are the ones that had this legal maturity issue where basically they weren't going to repay in time and issuers had to push those due dates back sometimes quite dramatically.
Tell me about the 50-year-old woman in your story who owes $250,000 in student loans.
She's a nurse anesthetist in Seattle who had student loans outstanding from various degrees she took out over the years. And like many borrowers, she had no idea that they were even packaged into these student loan trusts. So we did some digging.
How have IRS audit rates and staffing trends been changing recently?
We traced her particular loans to one of these trusts that sold these bonds. And we found that, like many students, there's about 7,000-some borrowers in that trust. And like many borrowers in that trust, she had an income-based repayment plan that was given to her And what that meant was her payment was lower, but she was going to take longer to repay. And to make room for that repayment, what Navient, the issuer, did was they extended the legal maturity date of those bonds. Originally, they were going to be 2043. They moved back to 2083, and another bond was 2054, moved back to 2083, when she will turn 114 years old.
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Chapters
6 chapters
1
What is the headline issue about student-loan-linked bonds and extended maturities?
0:05–2:15
2
How do income-driven repayment plans affect borrower monthly payments and loan timelines?
2:15–2:49
3
How are old federal student loans packaged into bonds and who bought them?
2:49–3:27
4
How have IRS audit rates and staffing trends been changing recently?
3:27–4:02
5
Why did issuers push bond maturity dates to the 2050s–2080s and what example illustrates this?
4:02–5:31
6
Do extended bond maturities shift costs to taxpayers and what are the long-term implications?
5:31–6:18
Speakers
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