Introduction and Overview

In the summer of 2022, New America managed focus groups with almost 50 borrowers from across the country who reported holding federal student debt and defaulting on their loans before the COVID-19 pandemic.¹ The focus groups included borrowers with a wide range of experiences. Some reported defaulting 20 years ago and communicating about their loans through the mail, and some borrowed and defaulted more recently and checked on the status of their loans online.

But whether focus group participants had been repaying for five or 25 years, most felt similarly about their student loans: hopeless. And they had good reason to feel this way. They entered the default system, which damaged their finances and eroded their economic security. Before they defaulted, many did not receive the benefits promised by higher education and were poorly served by a complex student loan repayment system, experiences that contributed to ongoing financial instability.

The focus group participants reported trying a host of strategies to keep up with their payments. They took on second jobs and worked side hustles. Some reluctantly took whatever financial help family members could offer. Many sought relief from the federal student loan system but were met with a confusing maze of policies and programs, received inadequate or incorrect information along the way, and were not initially aware of how the default system worked or its consequences. These experiences—in addition to their economic instability and the fact that some had spent decades in repayment with no end in sight—chipped away at borrowers’ capacity to manage their student debt while balancing other needs and obligations. As they became more and more overwhelmed, they searched for, but did not find, easily accessible repayment solutions.

These borrowers had options and choices on paper but, in reality, many needed higher education to access a career or move up the economic ladder and needed to take on debt to pay for it. One borrower explained, “it's not like I just don't want to pay this [loan]. I literally cannot afford to.” Focus group participants were often at the mercy of systems and actors not designed for, incentivized around, or held accountable for meeting their needs.

Default was not an active choice made by these borrowers. Rather, by the time they reached default, they had been failed by multiple systems. In the end, many participants internalized these system failures. They felt like they had personally fallen short and expressed embarrassment for not being able to repay. One borrower said that he felt “ashamed and also…like a failure, because I don't have the financial capabilities to pay my loan.” Another had not spoken to his family about defaulting on his student loan and frustration with his higher education experience because he did not “want them to know.”

Many participants also described feeling regretful, and as a result of their own experiences, borrowers reported telling friends and family that education, and borrowing for education, is not always a good deal. These conversations may unfortunately have even dissuaded their loved ones from pursuing college and its potential economic benefits.

As of March 2022, 7.5 million borrowers—close to one in five—were in default on their federal student loans.² Borrowers default when they miss at least 270 days’ worth of payments,³ and default not only causes family financial insecurity, but it also contributes to the racial wealth gap and related economic disparities. Those most likely to default on their loans—including borrowers of color, particularly Black borrowers; low-income, low-wealth, and low-resource students; those who do not complete a degree or credential; older borrowers; and those that attend for-profit schools, among others—are often least able to afford the severe financial consequences that come with default due to structural racism and discrimination that limit access to wealth-building, educational opportunities, and good jobs.⁴

Even though defaulting on a student loan is a worst-case scenario for borrowers, there is much we do not know about outcomes for those who default due to the complexity of the system itself, an absence of publicly available data, and a general lack of transparency by the Department of Education (the Department) and its contractors.⁵ And even less is known about borrowers’ experiences in and perceptions of default.

This report seeks to fill some of these knowledge gaps through an analysis of the six online focus groups mentioned above. It provides a narrative about why borrowers defaulted, the barriers they faced while in default, and how they attempted to bring their loans back into good standing.⁶ This analysis is focused on student loan default, but in order to fully understand the barriers borrowers face in default and how the higher education and student loan systems can better serve them, stakeholders—including researchers, practitioners, advocates, and policymakers—must better understand borrowers’ pathways to and through it. This paper’s key findings include:

• Key Finding 1: Before borrowers entered default, they did not receive the benefits promised by higher education. They reported going to schools that provided little support, often leaving without a degree or credential, and not being able to find the stable employment they had been promised.
• Key Finding 2: Before borrowers entered default, they struggled to access affordable payments amid financial insecurity. They faced challenges navigating a complex repayment system and accessing all of the safeguards available to keep them out of default. And these tools—and the assistance available to them from the Department and its contractors—were often inadequate and unresponsive to their financial situations. As they struggled to afford their car payments, rent, and child care, they fell farther and farther behind on their student loans.
• Key Finding 3: When borrowers entered the default system, its severe consequences further eroded their financial security. Participants lost track of their loans as they were transferred among different entities, 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. 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 student loan servicers, collectors, and the Department left many borrowers confused and without adequate aid or information.

In response to the pandemic, the government paused student loan payments and interest for most borrowers and collections for those in default starting in March 2020, and the Biden administration recently extended that pause through no later than June 30, 2023.⁷ In addition, the administration announced that it would cancel up to $10,000 in student loans for most borrowers—and up to $20,000 for those who received Pell Grants—an action with the potential to wipe out the debt of more than half of those in default and reduce repayment challenges for many others.⁸ (At the time of publication of this report, court orders had blocked this cancellation. The Biden administration is pursuing appeals and seeking to overturn those decisions.)

The administration, through its Fresh Start program, is also providing temporary relief to defaulted borrowers and a pathway back to repayment for those who are able to make arrangements to access it. These efforts complement a host of additional actions taken by the administration that will provide much-needed and long-overdue protections and benefits for students and borrowers. (See “Recent Initiatives that Benefit Borrowers in Default” for more information about these efforts.)

But current and historic failures in the default system continue to damage vulnerable families’ finances, highlight the need to ensure that plans to support struggling borrowers can be implemented before repayment restarts, and underscore the need for additional relief for those who have been trapped in default. In addition, this analysis provides a framework for designing a more borrower-centered, and less piecemeal, system going forward, including pathways to help borrowers exit default and avoid redefaulting on their loans, protect borrowers’ financial security, and rethink the default system as a whole.