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Student loan default starts the same way for everyone: a missed payment. Then, another. And another. Until nine total months — about 270 days — pass and your loan defaults.
Three months later, it gets much worse.
A debt collection agency now holds your debt, and you owe them the total balance of your loan along with late fees and collections costs. They can garnish your wages and withhold your tax refund. Your credit gets damaged, and you're no longer eligible for financial aid. Meanwhile, interest grows on your loan balance.
As of Nov. 22, the student loan payment pause was extended until as late as summer 2023 while lawsuits around Biden's debt forgiveness plan work their way through the courts. When payments resume government agencies, advocates and lawmakers worry that borrower default numbers could swell.
Concerned parties worry most about newer grads, students who didn't finish their studies, and those who had missed payments before the payment suspension.
It will take several months to see if those borrowers — about half of student loan recipients — will default, says Michele Streeter, director of policy and advocacy for The Institute for College Access and Success, or TICAS, a not-for-profit higher education research organization.
"It may be a slow-rolling disaster," she says.
Who is at risk for delinquency and default?
Most borrowers, however, are likely to avoid default, says Adam Looney, a nonresident senior fellow of economic studies at Brookings Institution.
"Most people who owe student loans are graduates, they may have advanced degrees and they have weathered the economic downturn better than every other American," says Looney. "After two years of a payment pause, many borrowers are in very good economic shape and should be well prepared to begin making payments."
But default can happen if your finances are shaky to begin with. About 90% of those who default entered college from a low-income background, according to federal data analyzed by TICAS.
It's not that people who can afford to pay are choosing not to, says Streeter.
"These are people who are trying to find their way out of poverty through enrolling in college and they weren't able to complete the program or it didn't pay off in some way," she says. "They have done all they can to break that cycle and something goes awry and they're deeper and deeper into a hole."
In a Jan. 27 report by the Government Accountability Office, the Education Department says about half of all borrowers are estimated to be at increased risk for payment delinquency, which is the first step that leads to default. Borrowers most at risk include those who:
Didn't finish their program of study.
Were delinquent before the payment pause.
Started repaying their loans within the last three years.
Your ability to repay is what affects your likelihood of delinquency — not how much you owe. Those with graduate and parent PLUS loans, which are not capped, tend to have the highest balances. But Looney says the majority of those with high balances are less likely to default. Numerous federal data analyses show borrowers who defaulted typically have low balances and did not complete school.
There may be outliers such as those with graduate programs that lead to lower-paying jobs and parents reaching retirement age.
You can't suddenly repay your debt if you don't have the money to do so. But you can work with existing options to ease the burden — even if you're unemployed.
How to avoid delinquency and default
If you can afford your monthly payment on a standard payment plan, stick with it. But if you can't make your payments and are at risk of default, connect with your servicer to:
Seek a more affordable payment. Consider an income-driven repayment plan, which ties your monthly payment amount to a portion of your income and extends repayment to 20 years for undergraduate loans or 25 years if you have any graduate debt or parent PLUS loans. It's possible that at the end of this repayment period, you could see the remainder of your debt forgiven, but it's uncommon.
Enroll in automatic payments. If you were signed up for autopay before the payment pause, you must contact your servicer to confirm you want to restart automatic payments; it won't happen without your consent.
Consider an additional pause. If you're unemployed or need a short-term payment pause, consider an unemployment deferment or hardship forbearance. However, interest will continue to collect and increase your loan principal.
If you're not getting the help you need from your servicer, contact the federal student loan ombudsman to escalate your issue. And report any mishandling of your loans to the Consumer Financial Protection Bureau, the Federal Student Aid feedback center, your state ombudsman or attorney general's office.
What borrowers in default can do
The Biden Administration lifted all borrowers with defaulted loans back into good standing, according to the April extension announcement. That means those borrowers won't face collections unless they default again.
It's unclear how resuming payments will affect borrowers with loans previously in default, but the fact that they defaulted in the past puts them at a higher risk. The Education Department doesn't have valid email addresses for at least 25% of them, according to the GAO report. And while the Education Department had previously suspended collections activities through six months after payments resume, it takes about nine months for a loan to default.
Borrowers with loans previously in default have more time to talk to their servicer about options to keep their debt in good standing. That could mean enrolling in an income-driven repayment plan or an additional pause.