Every year, 1 million student borrowers default on nearly $20 billion in federal loans.1 New data present the best picture ever accessible of who these borrowers are, the path they took into default, and whether or not they were able to return their accounts to good standing.2
The data show that the average defaulter looks very different from stereotypical portrait of a college student as someone who comes straight to college out of high school and lives in a dormitory on campus while pursuing a bachelor’s degree. Defaulters are more likely to be older, be Pell Grant recipients, and come from underrepresented backgrounds than those who never default. The median defaulter takes out slightly over $9,600—just more than one-half of what the median nondefaulter borrows.3 Three out of every 10 defaulters are African American and nearly one-half of all defaulters never finish college.
By and large, defaulters do not follow a straight line from entering repayment to defaulting at the earliest possible moment, after 270 days of delinquency. Instead, data show that defaulters take advantage of opportunities to pause payments without going delinquent. The median borrower took 2.75 years to default after entering repayment.4
Sadly, once borrowers defaulted, many had trouble getting out. Forty-five percent of defaulters have not found a solution to return their most recent default back to good standing. Of the 55 percent of defaulters who resolved their most recently defaulted loans, almost one-half did so by paying off the debt—a solution that could require them to pay large amounts in collection costs. These figures also do not reflect the fact that each year nearly 100,000 borrowers default on their loans for a second time.
Unacceptable default rates have equity and accountability implications as well. Repayment solutions fail the nearly one-half of African American borrowers who default on their loans.5 Although the federal government measures and enforces sanctions on colleges with high default rates, the accountability measure fails to track almost one-half of all defaults, which explains why only 10 institutions are at risk of losing access to federal aid this year.6
Federal policy cannot allow this default situation to persist. To be fair, it is possible that future numbers could look better as more borrowers take advantage of income-driven repayment (IDR) plans. These plans tie monthly payments to a set share of a borrower’s income, which in turn makes loan payments more affordable. However, there is minimal public information available on the characteristics of borrowers using these options. The effect of reforming repayment on the path out of default is also unclear. The U.S. Department of Education should conduct more analyses to assess how well these income-based payment plans address the national default problem and to determine if there are certain types of borrowers who need repayment assistance beyond these plans.
Furthermore, the conversation around student loan defaults must include the role that institutions play. Federal repayment options can only be effective if students leave school having acquired insufficient skills and knowledge or if they drop out after a short time. Changes to federal accountability systems—such as the creation of a risk-sharing system that requires institutions to cover a portion of costs when student loans go bad—may provide new incentives needed to encourage institutions to better focus on preventing the educational conditions that later lead to default.7