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Study: Why Borrowers Default

Before the nationwide pause on federal student loan payments, one-third of the nation’s nearly 43.4 million borrowers in repayment before the start of the pandemic had defaulted at some point. Of those borrowers, 46 percent were Black. Default is common, but little is known about the experiences of these borrowers who enter default.

A new study released by New America Wednesday provides a snapshot into the realities of student loan default. Default is when a borrower misses 270 days of payments and is punished with financial penalties like high collection fees, having their tax refunds garnished and the possibility to have federal benefits withheld.

Default disproportionately impacts low-income, low-wealth and Black, Latino and Native American borrowers. These groups have also been hit the hardest by financial hardship from the COVID-19 pandemic and could be at the highest risk to enter default once repayment begins again.

The study surveyed over 1,600 borrowers in 2021 and found that two-thirds of borrowers defaulted because they could not afford their student loan bill on top of necessary expenses.

Although the federal government offers a variety of repayment options that low-income borrowers can take advantage of to lower their monthly student loan payment, one-third of borrowers in the survey said that they were confused on how to find information on what repayment option was best for them or how to find the correct resources to enroll. Half of the borrowers surveyed said they did not know how to contact their loan servicer before entering default.

The study also found that default often places borrowers in a cycle of financial struggle. Of the borrowers surveyed, 20 percent said that they were unable to exit default.

The current pause on student loan payments is set to expire Aug. 31, however, there is some speculation that the pause might be extended by the Biden administration. Borrowers who were in default will have their records wiped clean through the Fresh Start program. The study warns that without extra support, the risk of these borrowers re-entering default is high.

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