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A recent study by The Pew Charitable Trusts reveals that defaulted student loans can lead to severe financial consequences, including a drop in credit score, collection fees, loss of eligibility for future financial aid, and more.
A recent study conducted by The Pew Charitable Trusts found that falling behind on federal student loans can result in significant financial consequences for borrowers. The research, which surveyed 1,609 borrowers who had defaulted student loans, discovered that over 80% of them had faced additional consequences beyond defaulting on their loans.
The most common impact of defaulted student loans was a drop in credit score, with 62% of borrowers experiencing this consequence. Other major consequences included collection fees (47%), loss of eligibility for future federal financial aid (37%), wage garnishment, suspension of professional licenses, and having Social Security or tax refunds offset.
Low credit scores can make it more difficult for borrowers to access other types of credit that are important to their financial lives, such as home loans, car loans, and credit cards. Despite these penalties, rates of default student loans and redefaults are still alarmingly high.
The survey also found that many borrowers are not aware of the specific consequences of defaulting on their federal student loan debt, with only a third of respondents being aware of the possibility of collection fees or wage garnishment before falling behind on their payments.
When a borrower has been past due on their debt between 270 and 360 days, they are typically considered to be in default. Federal student loan payments have been paused since March 2020 due to the COVID-19 pandemic, but they are set to resume 60 days after the legal issues surrounding the Biden administration's student loan forgiveness plan are resolved, or by the end of August, whichever comes sooner. Collection activity on the debt remains on pause as long as the bills are not overdue.
Fortunately, the U.S. Department of Education is offering a "Fresh Start" initiative to help borrowers who have defaulted student loans to get back into good standing. The program allows the 7.5 million student loan borrowers who are in default to return to repayment without a past-due balance. According to Phillip Oliff, director of Pew's student loan research project, low credit scores resulting from default can make it harder for borrowers to obtain other types of credit that are essential to their financial well-being, such as home loans, car loans, and credit cards.
According to U.S. Department of Education Undersecretary James Kvaal, if the government is not allowed to carry out its sweeping student loan forgiveness plan, there could be a "historically large increase in the amount of federal defaulted student loans and delinquencies and as a result of the Covid-19 pandemic."
Federal student loan payments have been on pause since March 2020 due to the coronavirus pandemic. They are scheduled to resume 60 days after the legal issues over the Biden administration's student loan forgiveness plan are resolved or by the end of August, whichever comes sooner. Collection activity on the debt remains on pause as long as the bills do.
Once the "Fresh Start" initiative officially launches, borrowers will start by selecting a repayment plan at MyEdDebt.Ed.Gov. The defaulted student loans will then be transferred from the Default Resolution Group to a new servicer. Once the borrower is matched with a new servicer and enrolled in a payment plan, the default should be automatically cleared from their record. EdaptUSA can assist with this whole process. Thousands of clients each year choose to hire our expert assistance because they are busy living their lives outside of student loans.
The opportunity is temporary, however, as borrowers will have a one-year window to switch to a new repayment plan and start making payments when the Covid suspension of bills concludes, which could be as early as May.
It is important to take action as soon as possible to avoid the last-minute rush to fix defaulted student loans.
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