- Roughly 1 million student loans go into default every year.
- Borrowers who default on a student loan can see their credit score drop by 50 to 90 points.
- Changes in policy could help distressed borrowers.
About 1 million federal direct student loans go into default every year, according to a report from the Urban Institute.
And although this problem is big enough on its own, other issues are tied to defaulting on these loans, too. Other discoveries highlighted in the report include:
- Nearly three in five borrowers who defaulted on their loans also had collections debt, compared with about a quarter of those who haven’t defaulted having collections debt.
- Borrowers who defaulted on a student loan saw their credit score drop by an average of 50 to 90 points one to two years before the actual default.
- Borrowers who default have more difficulty paying down their loan than those who do not default.
Click to read more about the average student loan debt in every state.
What Policymakers Should Consider to Address Student Loan Default
Urban Institute outlined five recommendations for policymakers to consider in order to address this student loan default problem. Here are those suggestions and what you can do to keep your loan out of default:
- Investigate how debt and collections obligations affect student loan repayment: Many of the borrowers who default have other obligations they choose to pay first. If you have student loans, keep your other debt, like credit cards or car payments, to a minimum.
- Look at credit scores to better target repayment assistance: A low credit score doesn’t disqualify you from getting a student loan, but the Urban Institute recommends that credit scores are used to provide additional assistance to borrowers who might be at greater risk for default. Because defaulters are often seeing their credit scores drop before the loan default, it is important to consider that they might need additional help so their score doesn’t continue to drop.
- Consider reshaping how loans that are deferred, delinquent or in default increase the borrower’s balance: Loans that are deferred continue to accrue interest, and late payers can incur late charges as well, adding to the loan balance. If you’re unable to pay your loan according to the terms, contact your lender right away to explore other options.
- Focus on discharge remedies that reach the highest-need borrowers: Filing for bankruptcy due to student loan debt is rare, so policymakers should look for other ways to help the most distressed borrowers. Bankruptcy should always be a last resort, so be sure you’ve done everything you can to avoid this drastic step.
- Do a better job of measuring student loan acquisition and repayment: There are many paths a borrower can take to repayment, including deferment and forbearance. Understanding these options can help borrowers and policymakers decrease the rate of default. Before you take out a loan, make sure you understand the requirements for paying it back, and what your options are if you can’t meet your obligation.
Paying for college isn’t easy, and student loans are often necessary. But before you sign on the dotted line, understand your obligations and have a plan to meet them. If you find you cannot pay back your loan, contact your loan servicer as soon as possible to work out a plan you can live with.
Click through to read more about how one expert paid off $40,000 in student loans in seven months.
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