Report Explores Student Loan Default Divide, Viable Fixes

For a large number of federal student loan borrowers, the repayment system is not working. A recent survey found that 50% of Black and 40% of Hispanic or Latino borrowers have experienced default, defined as 270 days of nonpayment, as compared with 29% of White borrowers. This is one key finding in a new report from The Pew Charitable Trusts that explores the repayment experiences of Black, Hispanic or Latino, and White borrowers who took out a federal undergraduate loan between 1998 and 2018. The research aims to better understand what drives such disparate repayment outcomes by race and ethnicity.

The report’s other findings show that:

• There are also significant differences in the rates of multiple defaults by race. Of those who have had a defaulted loan, around three-quarters of Black (74%) and Hispanic or Latino borrowers (75%) experienced redefault compared with 56% of White borrowers.
• Black and Hispanic or Latino borrowers are much more likely to face repayment barriers that research links to default. For example, they are more likely than their White peers to report facing financial burdens such as lower household incomes and unstable employment, and circumstances that can make navigating higher education more challenging, such as being the first in their family to pursue a postsecondary degree or having to pursue their studies part time.
• Current options designed to help struggling borrowers have had limited success and may be underused. Black and Hispanic or Latino borrowers are more likely than their White counterparts to report using a deferment or forbearance, which let borrowers temporarily pause their payments when facing repayment challenges. Income-driven repayment (IDR), which can provide more sustained relief by capping monthly payments based on income and family size, showed more varied enrollment by race. Hispanic or Latino borrowers reported using IDR at similar rates to White peers (32% to 31%, respectively) but significantly less than Black borrowers (45%).

Default can lead to severe financial penalties and collections, including negative credit reporting, seizure of tax refunds and Social Security payments, wage garnishment, and substantial fees. Borrowers with lower and varying incomes are more likely to experience default, with further financial strain resulting from the collection process.

It is important to note that a substantial body of research has identified structural, historic, and sometimes ongoing disparate practices that Black and Hispanic or Latino people have faced in the housing and labor markets as well as in education. Well-documented evidence of employment discrimination by race is one example of how such barriers can disadvantage borrowers in the labor market.

This report comes at a time when federal student loan default is at a major junction. Credit reporting on late payments recently resumed for the first time since March 2020, and nearly 10 million borrowers were found to be behind on their payments according to Government Accountability Office data from the beginning of 2024. And a Pew survey from May to July 2024 found that 91% of borrowers who reported that they had not made loan payments since the pandemic-related payment pause ended (in October 2023) said it would be difficult for them to start doing so. Moreover, around 6 million borrowers have a defaulted loan from before the payment pause. With collections set to resume sometime in 2025 and the possibility that default rates could skyrocket later that year when new defaults begin to occur, many more borrowers could suffer from the harsh consequences of collections with no viable route to successful repayment. All of this makes now a critical time for the Department of Education to reexamine the system and make major changes.

The report’s findings support a set of policy recommendations for reforming the default and collections system; these would benefit all borrowers who are unable to repay their student debt. Recommendations include:

1. Restructuring and expanding borrower pathways out of default. High redefault rates suggest that the current models for exiting default— rehabilitation and consolidation, both of which can be used only once—often do not lead to long-term positive outcomes. Multiple defaults also mean that Black and Hispanic or Latino borrowers are more likely to end up in a situation where they are faced with fewer options to exit default. The department should allow borrowers to return to good standing through enrolling directly into an IDR plan, which would allow them to easily access an affordable solution by capping monthly payments to their income and family size. At a minimum, the department must update the existing exit options to better and more expediently connect borrowers to affordable repayment plans.
2. Eliminating collections’ requirements that make it harder for borrowers to remain financially stable and repay their loans. Collections are often more expensive for borrowers than payments they would be eligible for on an IDR plan. This is counterproductive given that those who experience default typically have fewer financial resources and often have been disadvantaged by the postsecondary system, such as having to pursue studies part time. The department should make collections on par with IDR calculations, which would make it more feasible for those who are struggling financially to pay down their loans, while preventing borrowers from being pushed further into debt or even poverty. Borrowers will also be held accountable for repaying their debt if what they owe is more feasible.
3. Increasing the effectiveness of repayment tools by better matching borrowers with the right options. While the survey did not explore why borrowers used certain tools, past servicing audits have found that payment options are not always sufficiently shared with borrowers. Other studies have also documented challenges borrowers have faced when enrolling in and using IDR plans. The department should consider how to better ensure that borrowers facing repayment barriers are connected with the best options for their situations. A closer examination of borrower-servicer interactions, along with more data on how borrowers navigate the repayment and default systems, could help policymakers understand how to make further improvements that keep borrowers engaged and on track.

Read the full report to learn more survey findings and how policymakers can improve the repayment process for borrowers who face the biggest challenges.

Ilan Levine works on The Pew Charitable Trusts’ student loan initiative.

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 1,609 respondents. The margin of error for all respondents was +/-3.5 percentage points at the 95% confidence level. While different terms are used in literature to describe Hispanic or Latino populations (Latino, Latina, Latinx, Latine), Pew uses the term “Hispanic or Latino” to stay consistent throughout the article. The Pew survey used data supplied by the study panel to classify respondents’ race or ethnicity, which used the term “Hispanic” for this group.