New data documents a disturbing cycle of defaults for struggling student loan borrowers

New data shows a staggering number of struggling student loan borrowers are trapped in a cycle of default. Last year, nearly 1.2 million borrowers defaulted on a Federal Direct Loan—more than two borrowers every minute. In total, more than 8 million borrowers in the U.S. are in default on a student loan.  

A default can lead to severe consequences, including damaged credit, wage garnishment, and offset of social security and other government benefits. However, there is also a process to get back on track after defaulting on a federal student loan, including a path to obtain an affordable, long-term repayment plan tied to your income (known as Income-Driven Repayment, or IDR). 

Despite the growing scale of our student loan default problem and the high stakes for borrowers and taxpayers, new data suggests that this process is failing the borrowers who need it most. 

Last year, we published a report warning that hundreds of thousands of struggling student loan borrowers who tried to get back on track will end up back in default over the next two years, racking up at least $125 million in unnecessary interest charges on the way. We explained how a combination of problematic servicing practices and government programs can prevent the most vulnerable student loan borrowers from accessing affordable repayment plans—increasing costs to taxpayers and failing to set up borrowers for success over the long term. 

At the time, we asked several student loan servicers for more information about long-term outcomes for borrowers who were able to get out of default either by completing the student loan rehabilitation program or consolidating their defaulted loans.  

View the update from the CFPB Student Loan Ombudsman on transitioning from default to an income-driven repayment plan .

The data provided in response to our request painted a bleak picture for some of the most vulnerable borrowers: Nearly half of the highest risk borrowers not enrolled in an affordable repayment plan redefault within three years.

In addition, of borrowers included in our sample:

• The vast majority (greater than 90 percent) of borrowers who rehabilitated a loan were not enrolled and making payments in an income-driven repayment plan almost a year after getting out of default. The range of widely-available IDR plans should ensure that, for most borrowers, payments remain affordable over time. However, data indicates that fewer than 2 percent of borrowers were enrolled and making IDR payments for their first bill after rehabilitation. The vast majority of these borrowers still hadn’t enrolled in an IDR plan almost a year later—with fewer than 10 percent of borrowers making IDR payments by their ninth bill. 
• Borrowers who did not enroll in an income-driven repayment (IDR) plan were five times more likely to default for a second time. Growing evidence shows IDR is a key step to avoid default for many of the most vulnerable student loan borrowers. Data provided in response to our request shows that nearly half (45 percent) of borrowers who were not enrolled in an IDR plan ended up back in default within three years. Virtually all borrowers who defaulted for a second time (greater than 95 percent) were not enrolled in an IDR plan at the time of redefault. Of the small share of borrowers who did manage to enroll in IDR plans, less than 10 percent defaulted for a second time over a three year period. 
• A large majority (over 75 percent) of borrowers who default for a second time did not successfully pay a single bill after rehabilitation to their student loan servicer. All borrowers who complete rehabilitation have demonstrated their ability and willingness to successfully make timely monthly payments for almost a year (a requirement under federal law). After completing this process, borrowers are passed from a debt collector to a student loan servicer who is responsible for informing borrowers about repayment options that can help them stay on track. Of borrowers who rehabilitated a federal loan and then defaulted for a second time within two years, over 75 percent did not successfully satisfy a single bill from their student loan servicer. We estimate that as many as four out of every five borrowers who rehabilitate a student loan could be eligible for a zero dollar “payment” under an income-driven repayment plan, suggesting many of these defaults were entirely avoidable, especially for the most economically vulnerable consumers.   
• Borrowers who used consolidation as a way to exit default immediately begin to repay their debts successfully. Borrowers consolidating out of default almost always immediately enter an income driven repayment program—a key feature of the Direct Consolidation Loan process for defaulted loans. Despite relatively few borrowers using this mechanism to exit default, data provided in response to our request suggests these borrowers have better short-term outcomes. Of borrowers who recently consolidated their defaulted loans, nearly 95 percent remained in active repayment twelve months later. After two years, these borrowers defaulted at a rate 33 percent lower than the default rate for those who rehabilitate. 

As we learn more about the significant problems facing these struggling borrowers, we are working to protect all student loan borrowers and to strengthen servicing for borrowers most at risk of default. We also made it a Bureau priority to take action against companies that engage in illegal servicing practices. 

This data offers new evidence that borrowers, taxpayers, and the student loan industry would all benefit from clear, streamlined process to help previously defaulted borrowers succeed over the long term, and to ensure borrowers avoid default in the first place. You can read more about these recommendations in the CFPB Student Loan Ombudsman annual report .

Helping student loan borrowers make ends meet 

Borrowers looking for more information on how to get out of default or stay on track can check out our Repay Student Debt Tool. The tool provides a step by step guide on how to choose between the different types of income-driven repayment plans and other information to help. 

If you are having problems with your student loan, you can submit a complaint online or by calling (855) 411-2372.