Student Loan Borrowers Starting Repayment During Economic Downturns Can Face a Difficult Path

Historical data shows risk of faster default and offers lessons for what could happen when payment pause ends

Student Loan Borrowers Starting Repayment During Economic Downturns Can Face a Difficult Path

The novel coronavirus and accompanying economic downturn have taken a significant toll on households, businesses, and institutions of higher education nationwide. In response to the pandemic, payments, interest charges, and collection efforts for most federal student loan borrowers were paused at least through Sept. 30. But once this pause expires, many borrowers will have to navigate personal financial challenges and a confusing federal student loan repayment system.

A look at how student loan borrowers fared during the Great Recession—which officially ran from December 2007 through June 2009—can help policymakers understand the novel coronavirus’s potential impact on repayment outcomes. With that downturn, much of the increase in student loan delinquency occurred after its technical end and as the economy was recovering. For example, the share of student loan payments at least 90 days late decreased slightly from about 8% in 2007 to 7.3% in 2009 before jumping to 10.3% in 2013. This trend contrasted with other forms of consumer debt in which delinquency rates declined as the economy rebounded. Part of the increase in delinquency may be related to the surge in enrollment and subsequent borrowing among adult students who attended for-profit and two-year schools following the onset of the past recession.

Policymakers also benefit from understanding the paths that borrowers took before experiencing financial distress. Pew worked with researchers at the Research Triangle Institute to examine data from the Beginning Postsecondary Students Longitudinal Survey 2004/2009 cohort—a U.S. Department of Education dataset that tracks first-time, full-time students from the time they enter higher education in 2004 through 2015—and highlight differences in borrower outcomes for those who entered repayment from 2004-07 before the Great Recession and those who entered during and immediately afterward (2008-11).

This analysis indicates that borrowers who enter repayment during a recession may experience problems repaying their loans more quickly than those who begin in stable economic periods. As policymakers prepare to restart student loan repayment, they should ensure that the system is prepared to help all borrowers get back on track.

Borrowers who entered repayment during and immediately after the Great Recession defaulted on their loans or paused payments more quickly than borrowers who entered in prior years.

The median borrower who entered repayment from 2008 through 2011 and defaulted on their federal student loans did so after about 31 months of repayment. That’s six months sooner than those who had entered repayment between 2004 and 2007 and then defaulted. Both groups include borrowers who graduated and those who did not complete their programs. Borrowers in the 2008 through 2011 cohort who sought economic hardship deferments also did so more quickly after starting repayment than those who entered repayment from 2004 through 2007. (See Figure 1.)

Figure 1

Borrowers Entering Repayment During the Great Recession Defaulted or Paused Payments More Quickly

Time until first default or hardship deferment for those who entered repayment between 2004 and 2007 or between 2008 and 2011

Median time after entering repayment until: 2004–07 2008–11
Default 37.5 months 31.3 months
Economic hardship deferment 38.8 months 12.0 months

Source: Analysis of data from the U.S. Department of Education’s Beginning Postsecondary Students Longitudinal Study. Time until forbearance or other types of deferment than those for economic hardship are not viewable in the data.

The comparatively faster timelines underscore how recessions can affect borrowers’ experiences with the repayment system. The faster time to default for the 2008-11 cohort suggests that loan servicers may need to assist a surge of borrowers once repayment resumes. It also highlights the importance of making sure that servicers are well-staffed and ready to help borrowers.

Borrowers who had payments paused during natural disasters also experience difficulty when starting repayment again.

The pandemic pause for most federal loan borrowers is similar to the government’s response to recent natural disasters. For example, the Department of Education offered an emergency forbearance to borrowers hurt by Hurricane Harvey in 2017. Once this forbearance expired, delinquency rates increased as borrowers transitioned back into repayment. This increase was likely caused partially by the job losses that occur following natural disasters. Another reason could be related to borrowers changing addresses and losing touch with their servicers.

In addition, as students shift to part-time status or drop out because of disasters, some may enter repayment before completing their degrees and struggle with making payments. With similar shifts occurring over the past year, policymakers should track college completion and movement to part-time status as they prepare to restart repayment. Data from the fall 2020 and spring 2021 semesters suggesting that undergraduate enrollment is down could signal future increases in delinquency and default if students with loans do not re-enroll and complete their degrees.

Income-driven repayment plans may help borrowers avoid default, yet many still have trouble accessing them.

Today’s borrowers have access to improved income-driven repayment (IDR) plans that did not exist during the Great Recession. Yet many borrowers who could benefit from IDR plans struggle to access them. In a Pew survey this spring, two-thirds of borrowers (67%) with paused payments said that it would be somewhat or very difficult to afford their payment within the next month. The same survey found that about one-third of borrowers were repaying their loans in IDR plans, but Pew focus group research shows that many find enrolling—and staying—in these plans challenging. In addition to problems with accessibility, some borrowers said they saw IDR plans as unaffordable for their financial circumstances.

Before repayment resumes, the Department of Education should make sure that the student loan system is prepared to help those borrowers most likely to encounter difficulty. For example, the department and servicers should provide intensive, targeted outreach to borrowers who struggled before the pause, and servicers should be allowed to temporarily enroll borrowers into IDR plans without requiring extensive paperwork. 

In addition, Congress and the Department of Education should consider automatically extending the pause for borrowers who miss payments immediately after it expires. That move would give borrowers more time to manage their finances and servicers more time to reach them. Finally, longer-term policy changes to improve IDR, including the implementation of the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act, are also needed. 

Travis Plunkett is the senior director of the family economic stability portfolio at The Pew Charitable Trusts. Regan Fitzgerald is a manager, and Brian Denten and Jon Remedios are senior associates with The Pew Charitable Trusts’ project on student borrower success.

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Policymakers acted swiftly last year to help student loan borrowers after the onset of the COVID-19 pandemic and subsequent economic downturn by pausing most required payments through at least September 2021. Much of the recent student loan policy discussion has focused on short-term issues, such as borrowers’ abilities to make payments during a public health emergency, but what happened after the Great Recession suggests that repayment challenges could linger or accelerate after the pandemic ends.