Student Loan Borrowers With Default History Foresee Difficulties When Repayment Resumes

Editor’s note: Several data points in this analysis were revised slightly on June 10, 2022, as a result of data cleaning adjustments. The related topline and methodology documents were also revised to clarify the weighting scheme used for the survey.

With payments on federal student loans set to resume in early 2022 after a COVID-19-related pause, findings from a new survey focused on borrowers’ experiences with default indicate that the restart  could be especially hard for one group of vulnerable borrowers: those who have experienced default in the past but had exited it before the start of the pause.

The findings from a nationally representative survey conducted in mid-2021 for The Pew Charitable Trusts show that borrowers with a history of loan default may be more likely to face financial and informational barriers to payment resumption than those who have never experienced default. Still, borrowers with a past defaulted loan are more likely to say that they plan to reach out to their loan servicers proactively within a month after the payment pause ends.

The survey results highlight the need for Department of Education officials and loan servicers to pay attention to the specific needs of this subset of borrowers, along with other groups vulnerable to repayment challenges, as they develop plans for assistance efforts. (See Figure 1.)

The survey finds:

• Only 35% of those with a past defaulted loan said they could afford their same monthly payment when repayment resumes, compared with 55% of those who had never experienced default. Among those with a past defaulted loan, 30% said they could afford the previous payment and 35% said they were unsure.
• Meanwhile, only 64% of those with a past defaulted loan said that they had heard about the pause before the survey, compared with 87% among those who have never experienced default.
• Still, nearly half (49%) of those with a past default said they planned to reach out to their servicers within a month after the pause ends, compared with 44% of those who never experienced default.

The perceptions and attitudes among those who have a history of default should be a concern to policymakers because previous research shows that repeated defaulting is common among student loan borrowers. One study found that 41% of borrowers who exited default using either rehabilitation or consolidation had defaulted again within five years.

And borrowers who default more than once have more limited options for getting their loans back in good standing. Rehabilitation can be used only once per loan; consolidation is also often limited to a single instance. After these methods are exhausted, loans are usually stuck in default until they have been repaid in full, voluntarily or involuntarily. They also accrue more expenses such as additional collection fees.

Figure 1

Borrowers With Past Defaulted Loans Face Barriers to Repayment, but Many Plan to Seek Help

As COVID-19-related pause nears end, survey highlights potential difficulties for this group

Note: Percentages are weighted. Differences between subgroups are statistically significant at the 95% confidence level. Responses are among respondents who reported they were still in repayment in March 2020.

Source: Pew student borrowers survey, 2021

Because borrowers with a past defaulted loan express limited confidence or uncertainty about their ability to resume the same monthly payment, they could be at risk of defaulting again when the pause lifts. In addition, limited awareness of the pause could further jeopardize successful transitions for those with a past defaulted loan if information gaps persist when payments resume. Many could be at risk of missing payments, or not enrolling in the repayment plan that best suits their financial needs, simply because they are unaware of details about the end of the pause. For example, borrowers who were enrolled in auto-debit payments before the pause will need to be in contact with their servicers to opt back in.

One positive sign is the percentage of borrowers with a past defaulted loan who expect to proactively communicate with their servicers. Communication between this group and servicers could help boost the number who get into repayment plans that fit their financial situations. For example, research indicates that enrollment in income-driven repayment plans can reduce the chances of default for many borrowers, though analysis by Pew suggests that the plans as currently configured may not lead to affordable payments for many low-income borrowers.

These findings support two challenges that the Education Department has started to address. The agency has already issued a directive to bolster servicer call center hours to prepare for the potential influx of queries from borrowers as the pause comes to an end. The survey responses underscore the importance of these measures, particularly to help borrowers who have defaulted previously.

In addition, servicers will engage in targeted outreach under Education Department guidance. Such efforts should pay particularly close attention to borrowers who have defaulted in the past since they could be especially vulnerable to repayment challenges, such as repeated 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 of borrowers was conducted from June 18 to July 28, 2021, before the latest extension to the payment pause was announced. Data collection was among a sample of 1,609 respondents. The margin of error for all respondents was +/-3.5 percentage points at the 95% confidence level.

Phillip Oliff is a project director, Ama Takyi-Laryea is a manager, and Ilan Levine is an associate with The Pew Charitable Trusts’ student loan research project.