Stopping a Looming Student Loan Default Disaster

Dysfunction in the federal government continues to keep federal student loan borrowers in a state of perpetual chaos. While the pandemic payment pause provided critical relief for many borrowers, the transition back into repayment had been a bumpy, confusing one, even before the added tumult of the current administration.

At the start of the pandemic pause in March 2020, 8.6 million borrowers were in default. While a portion of those borrowers resolved their default during the pause—either through the “Fresh Start” program or via having their debt discharged—the most recent publicly available data shows that as of September 2024, 4 million Direct Loan borrowers and 2.8 million FFEL borrowers remain in default.ⁱ

Millions of Borrowers at High Risk of Financial Harm

While collections activities were paused during the pandemic, these borrowers are set to once again face a range of severe and punitive consequences as the federal government’s vast debt collection machine turns back on.

In addition to ongoing credit score damage and hefty collection fees, the federal government also wields vast extra-judicial powers to collect student debt, including garnishing wages and seizing Social Security payments and tax refunds that are targeted to households with very low incomes, including the Child Tax Credit and the Earned Income Tax Credit. These seizures compound financial hardship for those who can least afford it.ⁱⁱ

The federal government, states, and colleges can also impose a series of harsh penalties that are unrelated to collecting payments, including restricting access to further federal aid, withholding a student’s academic transcripts, and suspending professional and even driver’s licenses. These measures are not only punitive, they’re also self-defeating: by undermining someone’s ability to cover basic expenses, return to school to finish a degree, keep their job, or even drive a car, the default system makes it harder for someone who is already struggling to secure their financial footing.

In addition to the millions of borrowers who have remained in default since before the pandemic, millions more borrowers are behind on their payments and at high risk of entering default within the year. NPR recently reported that as of March 7, 2025, Education Department data showed that 9.2 million borrowers were late on their payments, with 4.2 million of those more than 90 days late. These borrowers are at especially high risk of entering default, which happens once a borrower has been late on payments for more than 270 days. (The Education Department has not made this data publicly available.)ⁱⁱⁱ

Borrowers Have Few Options for Help

Borrowers have limited access to assistance in getting back on track. The Education Department has been gutted, with hundreds of experts now gone from the Office of Federal Student Aid, which administers the federal student loan program and oversees the federal government’s contracted loan servicers. These cuts have eroded the Department’s ability to identify and correct servicing issues and to properly communicate with borrowers. Meanwhile, servicers are scrambling to comply with a stream of changes to the repayment system driven by legal challenges to the Biden Administration’s SAVE Plan.^iv

These challenges have jeopardized borrowers’ ability to enroll in income-driven repayment (IDR) plans, which offer more affordable monthly payments to help borrowers stay current on their payments and avoid delinquency or default. Applications for all income-based plans—even those unrelated to the SAVE-driven lawsuits—were shut down for more than a month, and while applications re-opened in late March, servicers are still not processing them.

Even before the applications were shut down, borrowers were facing long delays between applying for a plan and being enrolled in one, with the processing backlog growing by the day. Borrowers report facing extraordinarily long wait times when they reach out to their servicers, with some spending eight-plus hours on hold waiting to speak to customer support.

Borrowers have fewer resources than ever to navigate their repayment options, and those options are ever shifting. For many borrowers, this is likely to mean default. For those already in default, getting back on track is likely to be even more difficult than ever.

What Policymakers Can Do

Given the harm that default brings to individuals, families, and communities, helping borrowers stay out of default has long been a bipartisan priority. Default benefits nobody—even the federal government sees little return on its draconian collections efforts given the bureaucratic hurdles borrowers face when trying to resolve a default. All sides agree: the best path forward is to keep borrowers out of default through well-designed safety nets in a well-functioning repayment system.

Most importantly, to lower the risk of a wave of new defaults, policymakers must ensure borrowers have access to income-driven repayment plans. Without these plans, borrowers who simply cannot afford their payments have little recourse. These plans are the key safety net that enables borrowers to stay active in repayment even in times of financial hardship. Research shows that borrowers enrolled in an IDR plan default at much lower rates than those in non-IDR plans.

Any new plans should retain the basic design principles that have worked for two decades: monthly payments that are truly affordable and that scale based on a borrower’s income, paired with a “light at the end of the tunnel” that discharges any debt that remains after a set number of income-based monthly payments. Without such a provision, many persistently low-income borrowers would be stuck in the repayment system indefinitely without hope of ever repaying their debt—and many would likely default.

The federal student loan repayment system is dysfunctional and needs reform. The Department must provide sufficient and clear direction and resources to loan servicers to implement changes to plan options and to process applications in a timely manner. The Department should also fully implement provisions to automatically enroll struggling borrowers in an income-driven plan before they enter late-stage delinquency or default.

Servicers must also be held accountable for properly managing borrower accounts and providing expedient customer support. At minimum, this means properly calculating borrowers’ monthly payment amounts, ensuring correct reporting to credit agencies, and correctly tracking borrowers’ progress toward loan discharge.

Policymakers should make it easier for those already in default to get out of it. We urge an end to the self-defeating consequences that make it harder for borrowers to return their loan to good standing.

Policymakers should:

• Limit collection fees and stop seizing wages and tax credits from low-income borrowers;
• Allow borrowers to restore their loans to good standing more than once;
• Allow those in default to access affordable repayment plans so they can make progress on paying down their balance; and
• Restore borrowers’ ability to discharge student debt through bankruptcy.

Of course, the Department and its contracted loan servicers need sufficient resources to do all this. The system cannot function without proper funding and staffing. We urge Congress to recognize its role and ensure the Department can and will carry out its statutory responsibilities—or there is sure to be a default disaster affecting the immediate financial well-being of millions of their constituents.

ⁱ The most recent publicly available data from the FSA Data Center are from Q4 of fiscal year 2024, which ended in September 2024. Federal loan portfolio data have not yet been updated in fiscal year 2025.

ⁱⁱ The vast majority of those who default on student loans have faced persistent economic and social vulnerability. As of 2017, 87 percent of those who defaulted within 12 years of enrolling in college had received a Pell Grant at some point, meaning they likely entered college with a household income of less than $40,000. Those who were the first in their family to attend college are also more likely to default: nearly a quarter (23%) of first-generation students defaulted on their loans within 12 years, compared to 14 percent of non-first-generation students.

ⁱⁱⁱ The Federal Reserve Bank of New York published an analysis in March “attempting to estimate the scope of delinquent student loans at the end of the on-ramp by combining the most recent data (as of September 30, 2024) from Federal Student Aid with data from the New York Fed Consumer Credit Panel (CCP) from the same time,” finding: “After payments resumed, the volume of past due federal loans quickly returned to pre-pandemic levels and reached a new high of 15.6 percent by the end of the on-ramp period, with more than $250 billion in delinquent debt held by 9.7 million borrowers.”

^iv Approximately 8 million borrowers who were enrolled in the SAVE Plan continue to sit in the limbo of administrative forbearance while litigation drags on. These months in forbearance don’t count toward Public Service Loan Forgiveness, and borrowers have limited options to enroll in other PSLF-eligible plans to make progress toward discharge.