What Is Driving Student Loan Delinquency and Default?

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Research by The Pew Charitable Trusts and others shows that higher education continues to be a key driver of financial security and mobility: Earning a college degree triples the chances that those raised in the bottom 20 percent of the income ladder will make it to the top 20 percent. However, student debt poses a threat to many Americans’ ability to reap the financial benefits of postsecondary education. According to the U.S. Department of Education, as of 2017, more than 8 million federal student loan borrowers were in default—having made no payments in at least a year—and close to 3 million William D. Ford Federal Direct Loan Program (commonly known as “Direct Loan”) borrowers were more than 30 days delinquent. The first of the three 2016 expert conversations examined the factors driving delinquency and default.

The panel featured Susan Dynarski of the University of Michigan; Sandy Baum of the Urban Institute; Deanne Loonin, attorney and advocate for student loan borrowers; and Sarah Ducich of Navient, a student loan servicer; and was moderated by Danielle Douglas-Gabriel of The Washington Post. The group began by identifying which populations face the greatest difficulty repaying and are most at risk for delinquency and default. Dynarski and Baum suggested that policymakers and researchers should focus on low-balance borrowers—many of whom leave school without graduating and enter and exit postsecondary education with low earnings—rather than on those with high debt that often corresponds to high future earnings. Low-income, low-balance borrowers often have inconsistent and unpredictable earnings, and Loonin pointed out that this group may also struggle with other bills and financial obligations, all of which can make repayment a challenge.

Members of this and later panels indicated that the repayment options available to borrowers are diverse and complex and may be overwhelming. For example, borrowers must opt in to income-driven repayment (IDR)—a set of plans in which monthly payments are based on borrower income, and debt is forgiven after 20 to 25 years using a complicated and lengthy form—and enrollment can present administrative barriers.  

Dynarski proposed overhauling the current repayment system by automatically enrolling new borrowers in an IDR plan and using electronic payroll deductions to adjust monthly payments in real time as borrowers’ incomes change. The other panelists agreed that IDR and auto-IDR were promising options, especially for borrowers in distress, but Loonin noted that automatic repayment could prioritize student debt over other financial obligations and may not support legally justified nonpayment.

In contrast to the perspectives offered by the first three panelists, Ducich offered a loan servicer’s point of view on the repayment system. Although she acknowledged that many borrowers struggle for various reasons to repay their loans, she noted that when borrowers maintain contact and work with their servicers to identify appropriate repayment options, that is often enough to keep them from defaulting. However, Loonin indicated that the quality of interactions with servicers can be inconsistent and that once borrowers default, they are transferred from their servicers to a collections specialist and often have difficulty navigating a new set of options for becoming current on their loans.

In the second piece in this series, we look more closely at which borrowers struggle the most with repayment.

In January 2018, The Pew Charitable Trusts launched the project on student borrower success, a four-year initiative to promote successful repayment of student debt, especially among those borrowers at greatest risk for delinquency and default. This piece is the first in a three-part series reviewing an October 2016 series of expert discussions, hosted by Pew, on the state of student loans in America and outlining important issues in student debt repayment.

Sarah Sattelmeyer is a manager with The Pew Charitable Trusts’ student loan initiatives, and Brian Denten is an associate with the project on student borrower success.