Key Finding 2: Before Borrowers Entered Default, They Struggled to Access Affordable Payments amid Financial Insecurity

Even before the pandemic, borrowers who had defaulted were financially insecure, and the experience of attending low-quality programs without a financial return on investment and struggling to repay loans over months and years contributed to this insecurity. While focus group participants welcomed the respite from the ongoing pandemic pause in payments and collections, they had long faced economic instability, and most expected to continue to experience insecurity when repayment and collections resume.

A few borrowers defaulted soon after they entered repayment. But most took a winding path to default as they searched for solutions to their repayment difficulties. Some looked outside the student loan system, trying to increase their earnings by returning to school or by taking on another job. A few borrowers reluctantly turned to family members for help. And most participants tried to access repayment relief through the student loan repayment system but faced challenges navigating a complex repayment system and accessing all of the safeguards available to keep them out of default. 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.

Participants missed student loan payments, and eventually defaulted, because they were financially insecure

Borrowers’ financial insecurity was often caused by unemployment, injury, or illness. One borrower explained that he “couldn't make payments. [I] lost my car and my apartment, had to move back with my mom…and I got sick too…. I was struggling.” Another borrower reported that she “had [pregnancy] complications, so I had to quit working…[and] could barely take care of myself, let alone pay a student loan bill.” Multiple participants reported receiving public benefits from Medicaid and Medicare, the Supplemental Nutrition Assistance Program (SNAP), and the Temporary Assistance to Needy Families (TANF) program, among others.

Borrowers got behind on their payments when they had to choose between essentials and their loans.

“No one's going to pick paying their [student loans] over fixing their car.”

In a 2021 survey, most borrowers who defaulted reported doing so because they were not able to afford their payments (67 percent) or had other debt they needed to take care of first (71 percent).¹ Participants in these focus groups paid other bills—including rent, transportation, groceries, utilities, and child care expenses—first, not because they did not want to pay down their loans, but because they had limited resources and put family well-being first. For example, one borrower said, “I was making consistent payments. And of course my car broke down… and I need my car to work or take my kids to sports. So you’ve got to choose, ‘Do I fix my car or do I pick my payments?’ No one's going to pick paying their [student loan] payments over fixing their car.”

Most borrowers were not able to enroll in an affordable repayment plan when they first struggled to repay

Throughout repayment, borrowers must make a host of complex decisions among a variety of repayment plans and options, including IDR plans, forbearances, and deferments. While the complexity of the repayment system affects most borrowers, achieving success can be particularly difficult for those with the fewest resources.² Research from other fields, such as behavioral economics, and stories from recent focus groups and interviews highlighting borrowers’ experiences in repayment, underscore the fact that economic instability can chip away at the bandwidth that families have to manage complicated systems, especially when many are also using safety net programs, which have their own complex application processes and program requirements.³

For example, income-driven repayment plans calculate monthly payments based on a borrower’s income and family size, which must be recertified annually.⁴ Enrolling in these plans results in lower payments for many borrowers, and bills can be as little as $0 for those with earnings close to the poverty line, making them ideal for those struggling to repay their loans. In fact, borrowers in income-driven plans have lower rates of default.⁵ But despite IDR being the best option for many low-income and low-resource borrowers, it can be difficult to enroll and remain in these plans because of confusing annual paperwork requirements. Many who might benefit may not be able to access these programs and the forgiveness promised at the end of a lengthy 20 to 25 years’ worth of payments.⁶ And for some, these payments are still unaffordable.

In addition, the Department and its contractors have a history of providing inadequate information about IDR.⁷ The Department has reported ongoing concerns regarding borrowers' awareness of IDR plans, and the Department and its servicers have not consistently notified borrowers about these repayment options.⁸ And government oversight entities have turned up evidence of servicers directing borrowers to pause payments using forbearances even when they might qualify for an affordable IDR plan.⁹

As a result, most participants reported using forbearances to pause payments when they first struggled. When payments are paused, borrowers have a sure $0 monthly commitment, and the process for pausing payments using a forbearance can be quick, simple, and not require extensive paperwork. However, when their payments are paused, borrowers may see their balances grow due to interest accrual, and they can therefore pay more over the life of their loans.¹⁰

When borrowers’ payments are less than the interest that accrues on their loans in an IDR plan, their balances can also grow over time.¹¹ However, unlike with IDR, while their payments are paused, borrowers are typically not making progress toward forgiveness. Rising balances—regardless of whether they occur through time spent in deferments and forbearances, IDR plans, delinquency, or default—also come with psychological consequences, as borrowers feel like they cannot make a dent in their debt and there is no end in sight.¹² One borrower said that balance growth “feels like impending doom. You make payments, [but] it just feels like you're not getting anywhere because of the interest.” Another said that a growing balance “makes me feel like it'll never go away. Like I'm married to it. And it feels like no matter what I do, how hard I work to pay them off, they'll never go down because you're still accruing interest.”

Some borrowers described not knowing about IDR plans or being advised to try loan pauses when they first struggled to repay. While some participants may have been in repayment prior to widespread IDR eligibility, one borrower said that he “was just happy [to receive] the little three-month stall out. I was just doing that because that was the only option presented to me at the time.” This spring, the Department outlined new efforts to address inaccuracies in how payments were being counted toward IDR plans and to hold student loan servicers accountable for practices that “put borrowers into forbearance in violation of Department rules.”¹³

Balance growth “feels like impending doom. You make payments, [but] it just feels like you're not getting anywhere because of the interest.”

Other participants had been told about IDR but chose to pause their payments. Some were reluctant to enroll in IDR when their servicer could not promise an immediate, zero-dollar monthly payment. As one borrower said, “there were a couple other options [besides pausing], but it all involved money. So the only way to have no payment, which is the only thing I could afford at the time, was to go into forbearance.”

Participants used forbearances frequently, transitioning in and out of pauses or extending their pauses continuously. Generally, forbearances can be used for 12 months at a time and for a total of three years.¹⁴ Many borrowers reported “maxing out” these periods, and a recent New America analysis showed that a third of those who defaulted said they entered default because they had exhausted their ability to pause payments.¹⁵ While some participants knew that their forbearances were time-limited, others said that they were surprised when they hit the cap. Either way, most did not have a plan for other accommodations when their pauses ran out. One said, “I did so many forbearances that I maxed out. And at the time, what are you supposed to do? I couldn't afford it. So I just didn't pay.”

Some borrowers reported enrolling in IDR only after defaulting. Many participants built their knowledge of IDR plans over time through trial and error, interactions with the Department and its contractors, and their experiences in default. Those who were able to enroll—often after defaulting—noted that the plans were helpful in reducing monthly bills. (IDR usage may be higher for some borrowers after they default, given that one way to exit default, as described below, involves borrowers consolidating their loans and enrolling in an IDR plan.)

Many of these borrowers would likely have been eligible for a $0 payment on an IDR plan before defaulting.¹⁶ Even though more borrowers are enrolling in IDR plans today—and the Department will soon release proposed regulations and is implementing systems that address some of the challenges with IDR plans—focus group participants were still suffering from the consequences of their preventable defaults.