More than 1 million student loan borrowers each year go into default.
Outstanding education debt in the U.S. has tripled over the last decade and now exceeds $1.5 trillion, posing a greater burden to Americans than auto or credit card debt.
For many, the payments are proving unmanageable. By 2023, nearly 40 percent of borrowers are expected to default on their student loans. That's when a person has not made a payment toward their education debt in roughly a year, triggering it being sent to a third-party collection agency.
What kind of student loan borrowers are at risk of defaulting? And what's the financial impact on them of doing so?
A new report from the Urban Institute, a progressive think tank in Washington, D.C., answers these questions. The researchers analyzed the fates of borrowers who entered repayment in 2012.
Federal loans come with a lot of protections that should make default rare, said Kristin Blagg, a research associate at the Urban Institute, focusing on education.
However, she learned, that is not the case: Within four years after leaving school, nearly a quarter of the borrowers had defaulted. "To default is still pretty common," Blagg said.
She added, "I found that these are borrowers who tend to be in financial distress."
Defaulters are less likely than nondefaulters to have types of debt that require a risk assessment, like credit card, auto and mortgage debt. They're more likely than nondefaulters to have their utility and medical bills fall into collections, as well.
Blagg said these additional debt pressures can explain, at least in part, why some borrowers might be putting off their student loan payments.
People who default on their student loans are more likely to live in Hispanic and black neighborhoods, Blagg found. Previous research has shown that people of color are more burdened by their education debt, because they have less parental wealth to draw on as well as higher rates of unemployment.
In addition, the average defaulter resides in an area where the median income is around $50,000, compared with around $60,000 for nondefaulters.
Ironically, those with the smallest loan balances are the most likely to be unable to pay off their debt.
Almost 1 in 3 people who owe less than $5,000 for their education default within four years, compared with just 15 percent of borrowers who owed more than $35,000, the Urban Institute found.
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This is in large part because many students who drop out of school have less debt, but are more burdened by it since they don't have the benefit of a degree, said Mark Kantrowitz, a student loan expert.
In addition, he said, "They often lack awareness of options for dealing with the debt, such as deferments, forbearances, income-driven repayment and loan forgiveness."
By the time a person's student loans fall into default, they will see their credit score tank around 60 points, to an average of around 550, which is considered "very poor," by rating company Experian. Borrowers who stay current, on the other hand, have scores on average in the high 600s.
The government also has extraordinary collection powers with federal loans, since they're one of the only debts unable to be discharged in bankruptcy.
"Negative effects of student loan default can be wage garnishments, tax offsets, and other methods of loan collections," said Elaine Griffin Rubin, senior contributor and communications specialist at Edvisors. "In addition, some states suspend or revoke state-issued professional licenses, and some states suspend a driver's license because of a defaulted loan."
To make matters worse, defaulting on your education debt also increases the balance, likely due to collection fees and the accumulation of interest. After default, the Urban Institute found, a student loan borrower will see their balance balloon by around 10 percent.
These myriad consequences that come with a default can be hard to recover from, Kantrowitz said.
"At best, it delays participation in the American Dream," he said. "At worst, they are shut out permanently."
If you're struggling to repay your loans, you should call your student loan servicer as soon as possible, Griffin Rubin said.
You can find a more suitable payment plan, like one that will cap your monthly payments at a percentage of your income, or put your loans into forbearance, a temporary postponement of your debt. The former is preferable, Griffin Rubin said, because when you delay payments interest accrues and you'll ultimately be left with a larger balance.
If your loans are officially in default, call your loan servicer and ask them how you can return to good standing. Borrowers are typically presented with three solutions: loan rehabilitation, loan consolidation or paying off the loan in full.
Loan rehabilitation is only offered once to borrowers. The program requires you to make nine "voluntary on-time, reasonable and affordable monthly payments," as determined by the loan servicer, Griffin Rubin said. Then, you'll be out of default, and the record should be removed from your credit history.
Borrowers might also consolidate their loans to exit default, Griffin Rubin said.
"There are some conditions the borrower must agree to," she added, "like the type of repayment plan they will use to repay the consolidation loan."
Blagg said her findings should help policymakers and others understand which borrowers are most likely to need additional support throughout their repayment.
"There's a set of borrowers that aren't being reached by the policies we've put in place that can help borrowers stave off default," she said.