According to a survey for The Pew Charitable Trusts, about one-third of federal student loan borrowers have defaulted — generally defined as having gone at least 270 days without payment — at some point in the past two decades. And among this group of borrowers, nearly two-thirds have defaulted multiple times.
The survey, conducted in 2021, focused on borrowers who took out their first federal undergraduate student loans between 1998 and 2018. But the finding on the prevalence of re-default takes on new relevance now that the department of Education unveils plans to give borrowers a “fresh start” in repayment.
Under the initiative announced in early April, borrowers whose federal loans are in default will resume repayment at the end of the ongoing pandemic-related pause — which began in March 2020 — with their loans in good standing. The new policy will provide borrowers with a critical reprieve from the potentially severe penalties that may be imposed on them in the event of default. Yet the results of the Default Frequency Survey indicate that a clean slate may not guarantee that distressed borrowers will be able to keep their loans current over the long term.
Borrowers who receive a fresh start could still be vulnerable to serious repayment problems without further major changes to the current system, as the challenges that borrowers cited as the cause of their initial default may persist after they recover their loans in good standing. In the survey, respondents were asked to select the reasons why their loans are not repaid. They could choose several. Among the most frequently cited were other priority debts (72%), feeling overwhelmed (71%) and unaffordable payments (68%). Respondents who had experienced a re-default cited the same top reasons why their loans defaulted again.
These results are consistent with previous research suggesting that defaults and re-defaults are unfortunately common. A study using Department of Education data predicted that 38% of borrowers entering college for the first time in the 2003-2004 academic year would default by 2023, corresponding almost Pew’s default rate of 35%. Although data on re-default rates are limited, other research using the same administrative data found that 41% of borrowers defaulted again within five years on a loan that had been rehabilitated or consolidated.
Default and re-default rates in the survey can help broaden the focus of further research. While previous studies looked at specific cohorts of borrowers—those who entered school or repaid in the same selected years—these new data include borrowers who started repaying at any time over two decades. This helps to show the magnitude of default and re-default over a longer period and across different cohorts of borrowers entering the repayment system. The new research also sheds light on the reasons borrowers give for defaulting or re-defaulting on their loans.
In addition to the “fresh start” in reimbursement, the Ministry of Education announced other important policy changes related to default. In November 2021, it ended the role of private collection agencies in servicing delinquent loans. This change opens the door to a possible major overhaul of how the federal government conducts outreach to borrowers with delinquent loans and could prefigure additional reforms. As the government works to implement these and possible future initiatives, policymakers will need to have a comprehensive understanding of the challenges faced by borrowers who have defaulted so that proactive measures can be taken. to help keep borrowers on track. Otherwise, previous repayment issues could reoccur after the break is over.
In the coming months, Pew will publish a series of analyzes that will help fill in the gaps in existing information. Among the questions to be examined will include the financial situation of defaulting borrowers, their experiences with managers and debt collectors, their views on why they defaulted, and their pathways into and out of default.
This analysis is based on data from an online survey conducted by NORC using its AmeriSpeak Probability Panel on behalf of The Pew Charitable Trusts. This nationally representative survey, conducted from June 18 to July 28, 2021, studied borrowers’ experiences and perceptions of the repayment system with a focus on those who had previously had a loan in default. Conducted after the announcement of the federal student loan payment suspension in March 2020, respondents were asked to reflect specifically on their repayment and default experiences prior to the start of the pause. Data collection was carried out with a sample of 1,609 respondents. The margin of error for all respondents was +/- 3.5 percentage points at the 95% confidence level.
Ama Takyi-Laryea is manager, Ilan Levine is partner and Phillip Oliff is project director for The Pew Charitable Trusts Student Loan Research Project.