Student Loan Borrowers With Early Repayment Troubles Are 2.5 Times More Likely to Default

Student loan borrowers who do not make payments in the first three months of repayment are 2.5 times more likely to default at some point than those who did take steps to manage their debts. Such steps could include making payments that reduce balance size; enrolling in nonstandard repayment plans such as income-driven (IDR), extended, or graduated plans; putting loans in deferment; or consolidating their loans.

According to an analysis of longitudinal federal student loan data, this pattern holds true even when controlling for borrower factors such as age, gender, race, institution type, degree program, degree completion, and loan balance. Some of these factors have been linked to higher likelihood of default in previous analyses.

The findings build on research by The Pew Charitable Trusts that shows that borrowers who eventually default often miss payments early in repayment. Simply put, as the current pause on most federal student loans ends Jan. 31, 2022, early engagement with these borrowers by the federal government and loan servicers will be critical to help with the transition back into repayment.

An analysis of data from the Department of Education’s Beginning Postsecondary Students Longitudinal Study examined the relationship between early interactions with the repayment system and the likelihood of default. The work was conducted for Pew by RTI International, a nonprofit research organization.

The study tracked students who began their postsecondary educations in 2004 and followed their loan repayment through 2015. Because of limitations in the dataset, the effect of forbearance on long-term repayment success could not be evaluated. Forbearance allows borrowers to postpone or suspend payments. Some borrowers may find it easier to obtain a forbearance than to take the borrower actions analyzed here.

In response to the coronavirus pandemic and subsequent recession, Congress and the administration temporarily paused payments and interest charges for most loans in 2020 and suspended collection efforts for those in default. As the pause draws to a close early next year, the Education Department and loan servicers must prepare immediately to guide borrowers back into repayment successfully.

Tens of millions of borrowers will make the transition back into repayment at the same time. Many will have to fit student loan payments into their budgets for the first time in close to two years, while navigating a confusing repayment system. Servicers will need to provide specific and targeted assistance to those in financial stress.

This data suggests that making a special effort to help borrowers get on track in the first few months after the pause ends could be crucial in avoiding serious negative outcomes such as delinquency and default.

Helping borrowers restart payments successfully

The analysis indicates that taking a variety of steps or using available repayment tools—even if borrowers cannot afford full standard payments—can help ensure greater repayment success across the loan portfolio. The Education Department and servicers have begun reaching out to borrowers to encourage them to act before the pause ends. Further steps should be taken, such as contacting borrowers after payments resume and identifying best practices to provide help at that point, as well as in the first 90 days after a period of forbearance or deferment.

More specifically, the department and loan servicers should:

• Permit borrowers who now have lower incomes to enroll in or recertify for an IDR plan without a lengthy application process. The Education Department can seek ways to streamline access to IDR plans—in which payments are set according to income and family size—to better manage what is likely to be overwhelming demand for assistance. The government could permit servicers to temporarily enroll borrowers in IDR plans without requiring extensive paperwork—for example, over the phone, through a website, or through electronic communication. In the long run, timely implementation of the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act—which directs the Internal Revenue Service and the department to securely share relevant borrower tax return data—will reduce administrative roadblocks and help borrowers enroll more easily and remain in IDR plans.
• Automatically allow additional forbearance for those who miss payments immediately after current protections expire to give servicers more time to reach them. Policymakers should provide a grace period for those who struggle after the pause ends. They could allow additional short-term periods of paused payments automatically for those who do not act within the first few months of repayment. This would give servicers more time to reach these borrowers and give them more time to manage automatic debit arrangements. That could help ensure that borrowers do not experience negative credit reporting.
• Continue and expand targeted outreach to borrowers. Pew research highlights indicators that can help identify at-risk borrowers before they are in distress. For example, the Education Department and servicers could target communications to borrowers who were delinquent, experiencing hardship, or had paused payments repeatedly or for long periods before the pandemic.

These actions could help reduce the barriers to a successful restart for many. Given the effect of borrower engagement in the early months of repayment on long-term success, it is imperative that policymakers work to make the transition out of the pause as flexible as possible.

Travis Plunkett is the senior director of the family economic stability portfolio, Regan Fitzgerald is a manager and Lexi West is a senior associate with The Pew Charitable Trusts’ project on student borrower success.