After Years of Pandemic Relief, Why Are So Many Student Loans Still in Default?

For over four and a half years, defaulting on a federal student loan was impossible. When the pandemic struck in March 2020, the government paused student loan payments and continued extending the pause until last October. Even after payments resumed, borrowers received another year of protection through an on-ramp that shielded them from the worst consequences of non-payment, including negative credit reporting and falling into default.

Borrowers with loans already in default before the pandemic were protected from collection activity, including garnished wages, lost tax refunds, and seized Social Security. In April 2022, the Department of Education (Department) also made it easier for these borrowers to get their loans out of default. A program called Fresh Start let borrowers call their servicer or fill out a form to leave default—a big change from before the pandemic when most people left default through a cumbersome process that required making payments over nine months.

These protections—the on-ramp and Fresh Start—ended at the beginning of this month. Borrowers whose loans are in good standing will once again default if they don’t make payments for nine months. Borrowers whose loans were in default before the pandemic and remain in default will face a return to the more arduous process of exiting default and the restart of collections in 2025.

As the default system starts to look more like it did before the pandemic, it’s worth reflecting on what happened to the default portfolio during this unprecedented period. The total number of borrowers with student loans in default fell from 8.6 million in March 2020 to 6.8 million in September 2023—a roughly 20 percent reduction over three and a half years. That drop represents real progress and an improvement in many people’s financial lives, since student loan default is hard on vulnerable borrowers. Borrowers usually default because they can’t afford their loan payments alongside basic needs, and collections in default can be much higher than typical monthly payments.

Yet over six million people missed this opportunity to leave default and are once again facing the looming prospect of financial penalties. Why didn't more borrowers exit default during a time when no payments were due, no new loans could enter default, and it was relatively easy to exit?

How approximately 2 million borrowers did leave default provides some clues. In November 2023, the Department told NPR that over 300,000 people had opted into leaving default through Fresh Start. That corresponds with around 4 percent of borrowers who were in default when Fresh Start launched and one-third of those who exited default between the start of Fresh Start and the end of 2023. In addition to using Fresh Start, a small portion of defaulted borrowers likely exited default using the typical channels that existed before Fresh Start or by voluntarily paying off their entire loan balance.

Many more likely got their loans out of default thanks to automatically-applied debt forgiveness programs. Since March 2021, the Department has canceled some or all of the debt of 4.76 million borrowers, over 10 percent of borrowers with outstanding loans when the pandemic started. Many of these forgiveness programs—such as debt cancellation for permanently disabled borrowers and those whose schools defrauded them—likely disproportionately reached borrowers in default.

The contrast between the limited reach of Fresh Start, which required borrowers to learn about and then opt into the program, and the wider impact of loan forgiveness offers an important lesson: policies that automatically help struggling borrowers are far more effective than programs that require opt-ins. Borrowers vulnerable to default face many barriers to managing their loans, like a lack of awareness about relief options, unhelpful or misleading loan advice, and a sense of hopelessness that they will ever be able to pay off their debt. During the pandemic pause on collections, defaulted borrowers may have been even less likely to take action since they may not have realized that their loans remained in default or that their income would be at risk again after the end of the pause. These factors make it harder for struggling borrowers to take action on their loans, even if relief is technically available.

This insight into what works to get borrowers out of default should push the Department to prioritize providing automatic support for struggling borrowers when possible. For example, the Department wants to automatically bring recently defaulted loans back into good standing if a borrower’s income is low enough to qualify for $0 monthly payments under certain repayment plans; this relief should extend to borrowers in long-term default as well. The Department should also re-design the process for identifying borrowers who are experiencing financial hardship to automatically protect low-income borrowers from collections.

Still, not all student loan policies can be automated. For example, the Department plans to automatically enroll borrowers into more affordable repayment plans if they are 75 days behind on payments, which will help prevent defaults. But, first, the law requires the Department to get borrowers’ consent to access the necessary tax information.

Given this reality, the Department and its contractors should be working overtime to ensure that they can communicate with borrowers in default where borrowers actually pay attention. During the first approximately two years of Fresh Start, the Department’s direct targeted outreach efforts consisted of just three emails and one paper letter about the program. But Americans are inundated with junk emails, so simply sending more notifications through channels that defaulted borrowers may not check won’t cut it. The Department of Education and contractors should continue to expand – and evaluate – newer strategies like texts, push notifications, and partnerships with local non-profits to find more effective communication methods.

Time is running out for the millions of struggling borrowers in default to get help before their wages, tax refunds, and Social Security payments are seized. By learning from the lessons of the pandemic, policymakers have the chance to provide meaningful relief before the damage is done.