Key Finding 3: When Borrowers Entered the Default System, They Got Trapped

When they entered default, focus group participants lost track of their loans as their accounts changed hands multiple times, and they heard from a variety of entities charged with explaining a complicated system. For some, their paychecks turned up short, and their tax refunds were unexpectedly garnished. When it was time to move, credit score damage often meant they could not live in the neighborhoods they wanted to or easily access funds to buy a more reliable car. In effect, the default process was clawing back money from the same low-income families that government safety net programs were simultaneously working to lift out of poverty.

Many struggled to identify and use available loan discharge options and other pathways to exit default, and others got stuck because they had no affordable way out. Interactions with servicers, collectors, and the Department left many borrowers confused and without adequate aid and information.

Severe financial consequences of default can push economically insecure families into (or further into) poverty

For example, once in default:¹

• Borrowers’ wages can be garnished and their federal tax refunds and benefits—even those meant to prevent poverty, including the Child Tax Credit, the Earned Income Tax Credit, and Social Security—can be withheld.²
• Borrowers can be charged high collection fees.
• Borrowers experience damage to their credit scores, which can make it difficult or more expensive to get a car loan, rent an apartment, find employment, and buy a house.
• Borrowers lose benefits and protections that exist in the pre-default repayment system, such as access to IDR plans and the ability to pause payments.
• Borrowers are not eligible for federal financial aid if they want to or need to return to school, which is a potential path toward upward economic mobility for those who have not completed a degree or credential or need an additional credential.
• Borrowers’ professional licenses, in some states, can be suspended or cancelled.
• Borrowers’ balances grow because interest continues to accrue, which is not common when borrowers default on other types of loans.

The government and its contractors can collect using multiple mechanisms at the same time, meaning that some borrowers, for example, may have their wages garnished while also having federal benefits withheld. As a result, borrowers can pay more, and more quickly, after they enter default than they are required to when they are current on their loans. And there is no statute of limitations for collecting federal student debt.³

The default process was clawing back money from the same low-income families that government safety net programs were simultaneously working to lift out of poverty.

Low credit scores prevented participants from buying homes, living in convenient and safe locations, affording reliable transportation, and accessing employment opportunities. Credit score drops were the most commonly mentioned consequence in the focus groups. Low credit scores can affect job opportunities and quality of life by limiting transportation and housing options. Credit scores can also interfere with employment in a more direct way. One participant explained that a potential employer turned him down for a job because of his low credit score, a practice which is legal in most states.⁴

The credit score damage is the worst. It affects every aspect of adulthood. Home ownership has been difficult because of my student loans, even though I'm repaying them.

As a direct result of a hit to the credit score, I've had trouble. There have been times when I've had to move in a pinch and not been able to find an apartment because of the low credit.

Wage and tax garnishment prevented borrowers from building a financial cushion or investing in the well-being of their families. Some participants described feeling crushed when they realized they no longer had funds to dedicate towards their children. Others noted that a garnishment ate into their already low pay and prevented them from being able to handle any unexpected expenses. A recent New America analysis found that almost all of those who reported experiencing garnishment while in default said the collections caused financial hardship.⁵

I wasn't expecting it, and I have kids. That big chunk that you get every year [in tax refunds] is a big help to take care of your household. And when I had $5,000 or $6,000 taken away from me… it hurt.

At that point you don't have the option of whether you're going to pay it this month or if something is more pressing, you need something at the house, or your car breaks down or whatever, it doesn't matter. They're taking it, regardless.

High collection fees slowed participants’ efforts to get out of default. One participant said, “the collection fees sometimes were the amount of my payments…[I was paying] nothing towards the actual loan. [I] was paying the collectors money instead.” According to a recent survey, almost half of those who defaulted said they had experienced collection fees, and over 80 percent of that group felt like the fees damaged their finances.⁶

“That big chunk that you get every year [in tax refunds] is a big help to take care of your household. And when I had $5,000 or $6,000 taken away from me… it hurt.”

The loss of access to federal financial aid closed off an important route to higher earnings—completing a degree or credential. For a few participants, losing access to student loans and federal financial aid was the end of a dream of upward mobility. (In a recent survey, about one-third of those who defaulted said they were unable to obtain more financial aid for school.⁷) These participants felt that the loss kept them locked out of the education they hoped would end their financial struggles.

I wanted to get a college degree. I wanted to become a sociologist…. So, when I wound up in default, it was basically the end of that dream.

While I was in default…I couldn't return to school and finish my degree that I was so close to getting because I wasn't able to receive further financial aid or loans at the time.

Many participants did not understand the consequences of default, which impeded their ability to avoid them or plan for the future. While a few did know about these penalties, most were surprised when they saw their wages or tax returns had been garnished. Many people also reported finding out that they were in default through a credit report.

They would take my whole income tax refund and put it towards my student loans…. Not knowing that the first time around was heartbreaking.

I wasn't aware of what was going on with my loan until I saw the drop in my credit score and how many payments I actually missed.

Many struggled to exit default

Borrowers have limited pathways out of default, some of which can be used only once, and borrowers face different processes and fees for each option.⁸

• Full loan payoff: Borrowers can exit default by paying their full outstanding principal, interest, and any related collection fees voluntarily. Borrowers can make these payments all at once or over time, including through involuntary payments like garnishments.
• Rehabilitation: Borrowers can enter into a rehabilitation agreement and make nine payments within a 10-month period to exit default. Payments can be as low as $5 per month. This option can typically be used only once, and it removes the default from a borrower’s credit history.
• Consolidation: Borrowers can also exit default by consolidating their loans into a new loan in good standing and enrolling in an IDR plan or making three payments. Borrowers can typically only consolidate their loans once and the default remains on their credit history.
• Settlement agreements: In some cases, borrowers may be able to negotiate terms to close out a loan.
• Discharge or cancellation: Borrowers in default may be eligible for existing loan discharge programs, as described below.

Participants were unsure about the pathways that were available to exit default. Given the complexity of the system, many borrowers reported being reliant on the options presented to them by those collecting the debt instead of having a whole picture. One borrower said, “I thought [exiting default] was just doing whatever they said.” In fact, a recent New America analysis found that almost one-third of those who exited default were not sure how it happened.⁹

Some participants did not know whether they were currently in default.¹⁰ Often, these participants had resigned themselves to being stuck in default because they did not have money and the process to exit was too confusing, complex, or overwhelming; as a result, they no longer checked in on the status of their loans. The pandemic pause also added to this uncertainty and confusion.¹¹ “It's gotten to the point where I don't even know if I'm in default,” one borrower said. “My loans aren't even hitting my credit score, so it's kind of like I don't know what's happening anymore.”¹²

Often, participants resigned themselves to being stuck in default because they did not have money and the process to exit was too confusing, complex, or overwhelming.

Participants most commonly reported exiting default through rehabilitation. Federal data from 2018 show that far more dollars are typically collected through rehabilitation than consolidation.¹³ Previously, collectors may have been directing more borrowers to rehabilitation because their contracts compensated them more for rehabilitation than consolidation. They received a flat payment of $150 for a consolidated loan that entered an IDR plan and over 10 times as much for a rehabilitated loan.¹⁴ One borrower said, “the only way that I knew of [to exit default] was to make these small, scheduled payments every month on time and that was the plan I made and I agreed to.” While some borrowers were able to exit default via rehabilitation, at least one reported not being able to do so. And several borrowers noted being directed to make payments that did not lead to rehabilitation or exiting default.

Fewer participants described using consolidation, and historically, fewer borrowers have exited default through consolidation than rehabilitation.¹⁵ But borrowers who did use consolidation may have also been less aware of that process as it was happening. This could have been because borrowers can consolidate their loans when they are in good standing, consolidation is typically faster than rehabilitation, and consolidation may not involve making payments. One borrower who likely used consolidation to exit default described it as having “switched over to where they basically refinanced [my loans] somehow and it lowered the payments down tremendously.”

A few participants exited default by paying off their loans when they started making more money. Some believed that the only way to exit was by making enough—either through getting a better paying job or working multiple jobs—to pay down their loans. One participant said that he was able to get out of default because “I was doing really well business wise: I had a full time [job] and was just working my side hustle and just caught up and started paying [my loans].” These participants were rare; most continued to struggle with low incomes for years.

Many got stuck in default because they saw no affordable paths out. Research indicates that getting stuck in default is common. Among a cohort of students who entered school in 2003–04, the typical defaulter remained in that status for almost three years; 30 percent who defaulted had not exited default five years later.¹⁶ In the focus groups, borrowers reported that they got stuck for two main reasons: they did not know there were low-cost ways to leave default or they had previously defaulted and had no remaining low-cost paths available.

Some borrowers assumed that, without more money, there was nothing they could do to exit default. Some of these participants remained in default for years. One said, “I was just in distress with my life and…I noticed one of my checks got garnished and I couldn't really do a plan to pay that back, [because I had] this little meager job. It was months before I did anything about with it, because I didn't have any money.”

Some borrowers who defaulted multiple times may not have had any affordable way out of default. Borrowers can get stuck in default if they have already consolidated and rehabilitated their loans, as these options can typically be used only once. Borrowers can also exit through a settlement agreement (which is rare), discharges (many of which have historically been difficult to access), and by fully repaying (an option that is out of reach for many). The Consumer Financial Protection Bureau has warned that for some borrowers, “a subsequent default may be a permanent barrier to critical borrower protections.”¹⁷

There was probably some confidence that I could get back on track and do this and maintain it. But [I had] other student loans to pay, so I got behind again. And then I believe I defaulted on that same loan again….And that's been over the course of probably 10 or 15 years.

Eventually, I went back in default, and that's when they started taking my taxes. And I've been in default pretty much since then. So it's been rough, because when I do my taxes, I get paranoid, and I start dreading doing my taxes. I'm like, “They're going to end up taking them.”

For a few participants, staying in default felt easier than attempting to get out and make regular payments. A couple of borrowers mentioned deciding to use wage garnishment almost like an automatic payment for their loan debt. “I told them, ‘Just go ahead and garnish my paycheck.’ It just made it a lot easier than for me to have to keep remembering, set an alarm, or while I'm at work go make a payment,” one borrower said. This suggests both that these borrowers may not have fully understood the consequences of and ways out of default and that they valued automatic solutions to repaying their loans.

There were mixed outcomes on post-default trajectories. Some borrowers reported that their new payments were more manageable, including several who had entered an IDR plan. A few had taken on an extra job or experienced improved economic conditions that allowed them to make progress paying down their loans. But others said that their new payments continued to be unaffordable. These borrowers defaulted again after reentering a repayment system that had not served them well the first time around, without any new accommodations.

Forgiveness options were not advertised or accessible

A host of programs exist that provide access to loan discharges and forgiveness for federal student loan borrowers, as noted in the “Recent Initiatives that Benefit Borrowers in Default” section.¹⁸ Borrowers may also be eligible for other programs based on the types of loans they have, their occupations, and their experiences while in school, among other factors.

Borrowers reported learning about forgiveness and discharge programs primarily from friends, family, and their own research. A few people described outreach that may have been from the Department and its contractors or their schools, but this was not the norm. The Department does not always require this outreach, and large-scale promotional campaigns have typically not been conducted. The lack of official guidance is compounded by misinformation and scams related to loan discharge, which makes it challenging for borrowers to know whom to trust and how to understand their eligibility for various programs.¹⁹

As a result, many borrowers were unfamiliar with discharge programs or unsure about how to access them. Given recent actions and reforms made by the Biden administration, many of these borrowers may now be eligible for automatic discharges. But others still need to apply or file a claim.

Some reported being put off from applying for PSLF by the cumbersome and confusing processes, failures in program administration, and rarity of success stories, barriers that have received increasing attention in recent years.²⁰ Time spent in default does not count toward PSLF. But many borrowers explained that PSLF was not an option for them because, when they were in good standing on their loans, they had tried and failed to access the program.

One borrower said, “I've heard so many horror stories about getting that to actually work that I never hedged my bets on it.” Recent actions by the Department have made this program easier to access and qualify for, and some borrowers can become eligible over time by consolidating their loans or working for longer periods or for different employers.²¹ But only one borrower said that she reapplied, since the program has “new qualifications…[and] people are saying it's easier to get the student loan forgiveness.”

Knowledge of IDR forgiveness was extremely low among focus group participants, even though knowledge of and experience with IDR was relatively high. While time spent in default does not currently count toward forgiveness in any IDR plan, borrowers in IDR plans in good standing on their loans often talked about expecting to pay back their student loans forever instead of working toward forgiveness. The Department recently took action to correct past failures in administration of IDR, which will make it easier for borrowers to access these plans and get credit toward loan forgiveness for previous time spent in repayment.²² However, a recent report by a government watchdog confirmed that much communication about IDR plans from servicers and the Department has historically failed to mention IDR forgiveness and that the Department’s guidance does not always require this disclosure.²³

Participants who reported being defrauded by their schools expressed confusion and limited knowledge about discharge options, including borrower defense to repayment discharges. Not many participants understood this type of discharge. Among those that did, several mentioned barriers to applying or knowing how to access relief. Some of this confusion likely stems from the fact that, in recent years, the borrower defense policy has shifted considerably in terms of what borrowers need to do to access and be eligible for discharges. (For some, that relief may be automatic.) One borrower said that in “the news where student loans are going to be forgiven, I always hear my school…I see my school pop up. So it's like, all right, great. Do I need to do anything?”

Several borrowers went to schools that closed but did not know about or had not received a closed school discharge. While many borrowers can now receive a closed school discharge automatically, that has not always been the case. To access a closed school discharge, borrowers in the past, and some still today (once new regulations are implemented in 2023), are required to complete a short application about their enrollment histories. Some felt like the process as they understood it was too complex or they overestimated the complexity of what would be required. One participant said, “I had to prove that my school closed and all that…I feel like it was just too complicated to even try. Yeah. That's why I didn't even do anything, I think, at the time, because I was just like, ‘Oh, just more paperwork and stuff.’”

Despite a high level of reported medical and health issues, knowledge of disability discharges was also low among focus group participants. Many disabled borrowers also faced challenges accessing care, which, in addition to a lack of knowledge and information from the government and its contractors, could have been a barrier to getting a diagnosis that would have made them eligible for a discharge.

Interactions with servicers, collectors, and the Department left many borrowers confused and without adequate aid or information

When borrowers are in good standing on their loans, servicers manage their accounts, help borrowers access repayment plans and options, and collect payments. Once borrowers default, they are transferred to the Department and, until 2021, many were assigned to a private collection agency. Previously, these collectors were governed by different rules and incentives, received different types of compensation, and were subject to different types of oversight than servicers. If borrowers exit default, their accounts are transferred back to servicers.

Most participants experienced the repayment system as a continuum: they did not understand that the repayment and default systems were separate and run by different contractors.²⁴ One borrower said, “I don't really know how it works anymore, or who is a collection agency, or who is just the student loan [servicer].” This caused borrowers to be confused—reasonably, because they were hearing from myriad organizations—about the rules governing their loans, and borrowers sometimes used the terms “servicer,” and “collector” interchangeably. Another borrower said he was “just kind of confused because I didn't know how it worked and I didn't know that they had collections for student loans.”

When loans were transferred between contractors, borrowers had trouble keeping track of their accounts. The Department and its contractors made these transfers as borrowers moved between the repayment and default systems, between and among servicers as servicers left the system, and away from collectors as the Department ended its contracts with them. Borrowers reported feeling confused and frustrated when they had to track down and establish a point of contact with yet another company. This system also made it difficult for borrowers to make sense of which rules applied to their loans and when, who was contacting them, and why.

I wasn't sure who I should…make payments to….I just didn't have faith in it, because I didn't even really understand the process of transferring.

I've had so many loans that have been transferred that it's hard to keep track of which ones went where.

People viewed their engagement with both servicers and collectors as a negotiation, which could have contributed to feelings of confusion and frustration. To borrowers, communicating with a debt collector to establish a payment as part of a rehabilitation plan to exit default, selecting a pathway to consolidate loans, or engaging with a servicer around different IDR plans could feel very much like a compromise or mediation instead of a discussion of options.²⁵

I would have to negotiate after they called me. I pick up their phone [call]; we'd negotiate. "Okay. Well, I'm able to pay this price or I'll make payments."

I felt like they were just fishing for more information. They were trying to see what they could get out of me as far as maybe building their attack plan for getting money out of me, whatever they could do.

As a result of interactions with different entities, loan transfers, and general confusion, outreach from servicers and collectors often seemed like spam. This made it difficult for borrowers to know whether and when they were talking to legitimate entities, and it contributed to their not engaging with the system at all. Participants were right to be wary: student loan-related scam calls are rampant.²⁶

One of the focus group participants reported that he got scammed and paid a company that was not his loan servicer or collector for years. “When I was paying a different company for three years straight, I just believed them…[but]I found that it was a scam,” he said. “I asked the attorney general to look into it. He says other people have problems with this company. So now, I may be part of a class action lawsuit against them.”

When borrowers missed payments, many reported hearing from servicers and collectors. This is often how struggling borrowers found out about their options for handling their loans, especially forbearance and deferment. Borrowers also reported that servicers checked in at other inflection points, like for IDR recertification, for example.

Right away when I missed a payment, they provided the options to me about going to deferment or forbearance. And so I was grateful because I didn't even know that I had the option. I just thought I was doomed….They [also] contact me when it's time for me to renew my IDR.

If I missed a payment on the due date, literally by the next day, or two days later, they would contact me and remind me or ask me, “is everything okay? We noticed you didn't make a payment or [we] didn't receive it on time,” stuff like that. So it was helpful in that part.

Many borrowers felt like servicers, collection agencies, and the Department did not provide all of the information they needed, options they should consider, or relief for which they were eligible.

However, even with perfect program implementation, some borrowers in default may be hard to reach—or have lost touch with or not received or acted on communication from the Department and its contractors—making it more likely that they had insufficient information. A government report released in January indicated that contact information is missing for one-quarter of borrowers in default.²⁷ These borrowers, some of whom likely move frequently, may also not have known whom to reach out to about their loans.²⁸ In addition, when borrowers got confusing information from their contacts or heard that no accommodations were available, they often believed that was final and stopped communicating. One borrower explained that “I know I'm in default and…after they told me that I could not do the income-based thing, I just stopped checking.”

But borrowers did report reaching out to their debt collectors in response to the consequences of default. While the consequences—or threat of those consequences via communications from the Department and its contractors—“motivated” participants to bring their loans back into good standing, this was motivation in the way that a fire is motivation to leave a burning house. The consequences made the student loan the biggest emergency in a life full of other crises.

I'm like, "What do I have to do…so I won't have my wages or income tax and things like that taken away?" And they were able to help me there, set me up on a temporary plan where they had my checking account number and they took out so much money a month so I could get out of default.

When they took my income tax away, I reached out to them because I'm like, "I don't want this to happen again." I think that's the only choice they gave me.

Once communication was established, results were mixed. Many participants had good things to say about their student loan contacts, especially that they were friendly and helpful and did a good job explaining certain processes. One borrower said, “nobody wants to hear from a collector…but they were very helpful in trying to make it work for me.” Some borrowers also reported noticing improvement in communication over time. For many, the online systems operated by the Department and its contractors felt convenient and effective. Borrowers said that “it's pretty easy to go on the website and pay” and the online system “gives you all kinds of information…[like] different plans that you can choose from.”

But many borrowers felt like servicers, collection agencies, and the Department did not provide all of the information they needed, options they should consider, or relief for which they were eligible. As noted above, few knew about IDR forgiveness and other options for discharges, many did not understand key aspects of forbearance and deferment, and few were prepared for the garnishments, tax withholding, and credit score drops that followed their loan defaults. Since borrowers did not have a comprehensive understanding of the system or the pros and cons of various options, they felt reliant on the options suggested to them by servicers and collectors.

As far as required communication, yeah, I'm sure they fit the bill, but as far as being overly communicative, I don't think they were. And…I remember it being just sort of confusing, and it didn't really lay out all the options.

I was never asked any questions based on what I can afford, or given any options.

And some participants felt harassed, especially by collection agencies, interactions that left participants feeling even more overwhelmed.

When I went into default…all the collectors…were rude and so I just got to the point where I wouldn't even—I'd just hang up on them.

[The collectors are] trying to get the most out of you because it's business. Again, [you are] treated as a number…[and] over time you start getting these phone calls and then you start taking it personally. Like, am I the only guy in America that's defaulted on my student loan? Give me a break.