Among borrowers who have faced student loan default over the past two decades, a majority have experienced multiple consequences—and for many, these penalties have had a major financial impact, according to a new survey from The Pew Charitable Trusts. Although borrowers are largely cognizant that default carries consequences, awareness of specific consequences varies widely, which can cause borrowers to experience penalties they didn’t anticipate.
Student loans generally fall into default after 270 days of missed payments, though penalties typically aren’t imposed until after 425 days.1 The consequences of default can range from ineligibility to receive more federal financial aid or having the default reported to credit bureaus, to forced collections practices like tax refund and Social Security benefit confiscation, and paycheck garnishment, as well as associated fees. (See box below for additional detail.)
Pew’s research highlights the critical importance of looking beyond how the penalties listed above influence borrower behavior to understand the financial impact such penalties have on borrowers. Although there is some evidence that the threat of such consequences may cause borrowers to take actions to repay their loans, Pew’s survey findings also imply consequences can impose considerable costs on what past research suggests is an often vulnerable group. For example, past studies have found that borrowers who had greater financial need while enrolled in school or lower incomes while in repayment were more likely to have experienced default.2
The findings in this brief have particular significance because past research has shown that Black and Hispanic borrowers disproportionately experience default, as do women.3 This is not to say that race, ethnicity, or gender inherently lead to poor repayment outcomes. Rather, factors that disproportionately affect these groups—historic and persisting income and wealth gaps, as well as labor and housing market discrimination—could be at play here.4
Despite the presence of penalties that many borrowers perceive as causing significant hardship, default and redefault are alarmingly common: According to the survey, 35% of undergraduate borrowers have experienced default over the past two decades and two-thirds of those borrowers have defaulted more than once.5 This raises questions about the extent to which the current collections system and the penalties it imposes are promoting successful repayment.
To help inform ongoing and future policy discussions about reforming the repayment system to set borrowers on a better path to success, this brief provides novel insights from Pew’s survey findings related to three aspects of borrowers’ experiences with default-related penalties: