What Happens After Federal Student Loan Borrowers Default

By Jael Greene

A report on federal student loan defaults was recently released by the American Enterprise Institute. Since very little research has examined what happens to federal student loan borrowers after they default, this report focuses on the pathways that borrowers take after defaulting on a loan, in addition to reviewing federal policies that surround student loan default. The report uses NCES data that tracks the performance of federal student loans of borrowers who began their postsecondary education in 2003-04, focusing on borrowers who defaulted at least once between July 2003 and April 2016.

Key findings include:

• Within a year of defaulting on a federal student loan, 13% of defaulted borrowers exit default status, but this increases over time.
  • Three years after defaulting the percentage of borrowers who have exited default status increases to 52% and the percentage of borrowers exiting default status increases to 70% after five years.
• Borrowers that exited default status within five years varied slightly by race.
  • Of those borrowers who defaulted on their loans, 73% of white borrowers, 70% of Latino borrowers, and 65% of African American borrowers exited default status within five years.
• More than half of defaulted borrowers owed less than $10,000 in outstanding student loan debt when they entered default status, while almost a third had less than $5,000.
• 31% of all defaulters exited default status by paying their balance off in full within five years without any consolidation or rehabilitation, but rates differ based on amounts of debt.
  • 41% of borrowers who had less than $5,000 in outstanding debt exited default status by paying their balance off in full within five years.
  • 23% of borrowers who had more than $20,000 in outstanding debt exited default status by paying their balance off in full within five years.
• 41% of borrowers who exit default status through rehabilitation or consolidation re-default on their loans within five years.