Many Student Loan Borrowers Vulnerable to Default When Payments Resume

This article is the second in a series looking at survey data to analyze which student loan borrowers are most likely to experience default. 

The federal student loan payment and interest pause that has been in effect for more than three years is scheduled to end later this year. An analysis of survey data, coupled with emerging financial trends such as rising consumer debt delinquencies and persistent inflation, suggests that many borrowers could face economic headwinds in the months ahead that will make them more susceptible to repayment challenges when the pause ends.

The results of the survey done for The Pew Charitable Trusts show that those with fewer and more tenuous financial resources are more likely than other borrowers to have ever experienced default. Federal student loans go into default after 270 days of nonpayment.

Earlier research has highlighted the link between lower income and default risk, but the latest survey data indicates that borrowers facing a broad range of other financial challenges—such as more volatile incomes and lower levels of overall wealth—experience default at higher rates than other borrowers.

Recently, policymakers have taken several steps to address the needs of struggling borrowers when repayment resumes. For example, the federal government’s Fresh Start initiative gives them an opportunity to get loans out of default. In addition, proposed changes to the government’s Revised Pay as You Earn (REPAYE) income-driven repayment plan will make payments more affordable for many borrowers. And President Joe Biden’s student loan forgiveness program, if it withstands a Supreme Court challenge, would completely eliminate the loan balances of many borrowers with default experience.

But even with those policies in place, millions of borrowers will still owe billions of dollars, and many will continue to be at risk of loan repayment difficulties and future defaults. For borrowers already facing other financial challenges, affording payments for the first time in three years may be especially challenging.

Financial status

The analysis explores the financial status of borrowers who were in repayment as of summer 2021 to better understand how their financial characteristics were linked to the likelihood of default. The data on key economic factors such as household income builds on earlier research that has provided data on how people from low-income families tend to experience default more frequently than other borrowers. Some details:

• Household income. Borrowers who reported the lowest household incomes as of 2019 were more than twice as likely to have ever experienced default at the time of the survey than borrowers in the highest income group (64% and 24%, respectively), with a noticeable difference between families making less than $50,000 and those earning $50,000 or more.
• Wealth. Similarly, at the time of the survey, those with $0 net worth—when borrowers have roughly equal debt and assets—or negative net worth (49%) were more likely to have ever experienced default than those with more assets than debt (21%). Research has shown how generational wealth gaps—especially by race—leave some families more reliant on student debt and less able to weather financial shocks after leaving college.
• Employment type. Among those actively pursuing work outside the home, unemployed borrowers were more likely to have ever had a defaulted loan than those employed part time at the time of the survey (64% and 52%, respectively). Meanwhile, unemployed borrowers were nearly twice as likely as those employed full time (33%) to have experienced default.
• Public assistance. Respondents who reported enrolling in public assistance programs such as Medicaid, Temporary Assistance for Needy Families, or the Supplemental Nutrition Assistance Program (SNAP) at any point in 2019 were significantly more likely to have ever had a defaulted loan than borrowers who were not enrolled (61% and 32%, respectively). 

Financial disruptions

Beyond capturing the current financial status of those who were in repayment at the time of the survey and had ever experienced default, Pew researchers also sought to explore how the likelihood of default varied by the experience of—or ability to prepare for—financial disruptions. The findings examine the impact of:

• Employment gaps. Respondents who reported experiencing employment gaps of four months or longer in a typical year before the pandemic were more likely to have ever had a defaulted loan than those who did not (60% and 32%, respectively). Employment and income stability are key factors for successful repayment after the payment pause ends.
• Household income volatility. Those with household incomes that varied “quite a bit” month to month in a typical year before the pandemic were more than twice as likely to have ever experienced default, compared with those whose incomes remained “roughly the same” (67% and 32%, respectively). Borrowers who face economic turmoil heading into the resumption of payments may continue to struggle because even the most flexible repayment plans do not change specific monthly payment amounts until annual certification of income or borrowers request an adjustment.
• Ability to afford unexpected expenses. Like many Americans, many borrowers would struggle to handle a financial emergency. When asked to think about how well they would have been able to “handle a major unexpected expense" before the pandemic, borrowers who responded “not at all” or “very little” were the most likely to have ever had a defaulted loan, compared with those who answered “somewhat” and “very well or completely” (50%, 42%, and 28%, respectively). Unexpected expenses may be related to shorter-term defaults, in which loans remain in default for a relatively short period of time; if unexpected expenses are frequent, this could put borrowers at risk of churning in and out of default. 

This survey data builds on research that has identified which borrower groups are most likely to experience default. It highlights the importance of understanding the likelihood of default based on borrowers’ broader financial resources and experiences with unexpected events. It also explores the challenge of being able to handle competing financial pressures while juggling student loan obligations among borrowers who have ever experienced default.

Millions of Americans are slated to begin making student loan payments at some point this year, many for the first time since March 2020. As the Department of Education prepares for this massive transition, including allowing borrowers with defaulted loans to return to good standing through “Fresh Start,” policymakers should consider which types of borrowers have historically been more likely to experience default and may be most likely to do so once repayment resumes to lessen the chances of future repayment struggles.

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, conducted from June 18 to July 28, 2021, studied borrowers’ experiences in and perceptions of the repayment system with a focus on those who had ever had a loan in default. Conducted after the federal student loan payment pause was announced in March 2020, the survey asked respondents to think specifically about their experiences with repayment and default before the start of the pause. Data collection was among a sample of 1,600 respondents. The margin of error for all respondents was +/-3.5 percentage points at the 95% confidence level. This analysis is among a subset of the full sample to include only borrowers who classified as still being in repayment at the time of the survey. This analysis excluded 14 borrowers who did not know the repayment status of their undergraduate loan(s).

Lexi West is a principal associate with The Pew Charitable Trusts’ project on student borrower success, and Ilan Levine is an associate and Ama Takyi-Laryea is a manager with Pew’s student loan research project.