student loan defaults payment arrangements

Research finds that certain pathways out of default lead to particularly worse outcomes and may lead borrowers to re-default. Borrowers experience obstacles transitioning to more affordable payments in an income-driven repayment (IDR) plan-which ties monthly payments to borrowers’ incomes and family sizes and offers loan forgiveness after 20 to 25 years of qualifying payments after exiting default.Black and Hispanic borrowers are more likely to default than White borrowers-a disparity that may arise from differences in family income and wealth, along with the effect of persistent housing and labor market discrimination. Default largely affects borrowers experiencing other forms of financial insecurity, and a large number of borrowers who exit default end up defaulting again (often referred to as “redefault”).This report analyzes research on this system to identify the problems that cause it to break down for borrowers and proposes reforms that support the department’s overarching goal of keeping borrowers in repayment and out of default as the government moves forward with a new default system. Regardless of these and other policy actions that may also be on the horizon, many borrowers will still have student loans to repay-and those who will default in the future will have to contend with a broken system that fails to provide them with adequate solutions to prevent negative financial outcomes beyond the initial default. This is projected to eliminate the balances of more than 40% of borrowers, 3 and because many borrowers in default have low balances, a large share could see their full balances eliminated. 2 And most notably, the department announced in August 2022 that it would cancel $10,000 in outstanding federal student loans (and another $10,000 for borrowers who received Pell grants) for qualifying borrowers who apply.

The department has also announced that borrowers with federally held loans will have a “fresh start” when repayment resumes, moving all borrowers to current status and eliminating record of default that existed prior to the onset of the repayment pause. Department of Education ended its relationship with existing private collection agencies (PCAs) previously contracted to collect on loans in default, marking the start of a significant transition for the portfolio in terms of who is responsible for engaging with borrowers. Repayment and collections on federal student loans were paused in March 2020 in response to the COVID-19 pandemic. The policies surrounding student loan repayment and default are currently at an inflection point. Consequences of default can be severe and include wage garnishment, money being withheld from Social Security benefits, and damage to borrowers’ credit scores. 1 Although borrowers are considered to be in default after they have failed to make payments for at least 270 days, they typically do not experience the full consequences of default until after they are around 425 days past due. As of December 2021, about 43 million Americans held federal student loans, and about 20% of those borrowers were in default, meaning they have failed to make payments for at least 270 days.

Student loan defaults payment arrangements