By Chris Hicks | December 11, 2024
For the first time in four-and-a-half years, millions of student loan borrowers will soon feel the economically draconian penalties of a student loan default once again. According to federal data, more than 5.5 million borrowers are in line to begin receiving collection notices at any moment. Making matters worse, as many as seven million additional borrowers are on their way to default, behind on at least two payments according to the latest data released by the U.S. Department of Education.
How did we get here?
Before the COVID-19 pandemic, nearly one-in-five student loan borrowers was in default, with more than one million borrowers defaulting every year and a new federal student loan borrower defaulting every 26 seconds. As delinquency and default rates on student loans remained stubbornly high compared to every other type of consumer financial product, federal policymakers developed an array of protections for borrowers to drive down the number of borrowers missing monthly payments. The most notable of these protections are Income-Driven Repayment plans, which tie how much a borrower must pay every month to their income and family size. For the lowest-income borrowers, these plans can even cap their monthly payment to $0. If the system works, this allows tens of millions of borrowers to adjust their monthly bill to fit within their budget and successfully avoid defaulting on their loans, with the promise of cancelling the remaining balance after 20-25 years of repayment.
Unfortunately, this protection suffers from a fatal flaw: it depends on student loan servicers—the companies hired and paid hundreds of millions of dollars by the federal government to help borrowers manage their student loan debt—actually doing their jobs. In particular, it requires student loan servicers to assist borrowers in navigating the various repayment plans available, picking the right one for their unique financial situation, and completing onerous paperwork. Doing so—along with helping borrowers remain in these plans and ensuring their payments are successfully tracked—requires that borrowers have student loan servicers that can be relied on to deliver timely, accurate, and complete information regarding borrowers’ rights.
Despite this crucial role, all evidence shows that these companies fall far short and instead rely on predatory practices to maximize profits at all costs, keeping borrowers drowning in debt and leading millions into unnecessary defaults.
Who is in default?
Default is a shockingly common outcome for borrowers in the federal student loan system. But while default affects every population of student borrowers, its effects are felt disproportionately by certain communities:
- Older borrowers often face the greatest repayment struggles, with nearly 40 percent of federal borrowers over the age of 65 in default on their student loans.
- Borrowers who did not complete their certificate or degree, therefore those who are facing college-level debt without college-level earnings, default at up to three times the rate as those who did earn a diploma.
- Like much of the damaging consequences of the student debt crisis, default falls hardest on Black and Latino/a communities. One study found that over the past 20 years, half (50%) of Black and 2 out of 5 (40%) Latino/a student loan borrowers have had a loan default, compared with less than a third (29%) of white borrowers.
Once borrowers fall into default, the prospects of the student loan system guiding them back on track are grim. Because there is no statute of limitations on collections for federal student loans, these borrowers can remain locked in the Department’s debt collection machinery indefinitely. And indeed many do; as Department data from June 2021 shows, of borrowers who were in default before the COVID-19 payment pause, nearly one million had been in repayment for 20 years or more.
Further underscoring the bleak picture these financially distressed borrowers face once they slip into default, data released by the Department reveals that among the 9.5 million borrowers who were in default at the start of COVID-19 on a federal student loan, more than 70 percent remain in default today.
What does default mean for borrowers?
Defaulting is extremely costly and damaging for borrowers. As we have written before, defaulting on a federal student loan can harm borrowers’ ability to find a job, rent a home, or maintain a professional license, all on top of a mountain of interest and additional fees being added to their debt. Borrowers also face harsh collection measures, including wage garnishment and the seizure of the critically needed Earned Income Tax Credit meant to keep people out of poverty.
The consequences of default are particularly ruinous for borrowers with fixed incomes, including older borrowers and borrowers with disabilities, who often find themselves falling below the federal poverty line when the Department offsets their Social Security benefits to recoup defaulted student loans. In 2016, the Government Accountability Office found that the offset of Social Security benefits due to defaulted student loans pushed tens of thousands of seniors into or deeper into poverty from 2001 to 2015.
Beyond taking critical resources, these defaults cause countless additional spillover effects across borrowers’ lives, including making it harder for them to keep a job and even to maintain their physical health. This has a ripple effect on local communities, which can cause lasting damage to the economy as a whole.
An uncontrollable debt collection machine.
For years, advocates have raised concerns about the predatory design and implementation of the Department’s practices for collecting on defaulted student loans. As noted above, the Department holds unparalleled powers when it comes to debt collection, with the ability to garnish wages, offset Social Security benefits, and seize the poverty-reducing Earned Income Tax Credit, all without a court order, making the Department one of the most aggressive debt collectors in the country.
The COVID-19 pandemic shed light on the collection system’s widespread problems and dysfunction. In March 2020, Congress passed the CARES Act to provide critical relief as the pandemic upended the global economy, including requiring the Department to cease collection on defaulted loans. Yet relief for tens of thousands of defaulted student loan borrowers never came, as wage garnishment continued. Court filings and investigations found that the Department was unable to stop garnishing workers wages, leaving these borrowers to struggle under the weight of a broken student loan system at the worst possible time.
While these findings stem from the relief provided by Congress in the context of COVID-19, the Department’s inability to control its debt collection machine is emblematic of the flawed system that defaulted borrowers have suffered under for decades. In fact, just this week, the Consumer Financial Protection Bureau took enforcement action to address unlawful student loan debt collection practices by Performant Recovery, Inc. against Federal Family Education Loan borrowers which is representative of the risks to all defaulted federal loan borrowers. Once the debt machine turns on, not even the Department can guarantee that it will stop, even when required by law.
What can defaulted borrowers expect next?
As a result of the Biden Administration’s debt relief efforts and Fresh Start program—a temporary initiative that helped defaulted borrowers get back on track with their student loans—millions of borrowers are no longer in default. However, more than five-and-a-half million borrowers remain in default and early indications suggest that millions more will default by the end of 2025. In the coming months, defaulted borrowers will start receiving notices indicating that they will once again be subject to involuntary collection. Unless borrowers take action, they are rapidly heading into financial disaster by a default system that remains as broken as the day it was turned off.
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Chris Hicks is a Senior Policy Advisor at the Student Borrower Protection Center, and focuses on the intersection of consumer and labor protections.