With most payments on federal student loans paused to provide relief during the COVID-19 pandemic, borrowers haven’t been at risk of defaulting on their student debt for more than two years. Many borrowers took this opportunity to put their previously defaulted loans back in good standing. Although curing these defaults presents an opportunity for borrowers to improve their financial circumstances and avoid involuntary collections, many of these borrowers may be at risk of defaulting again after the pause ends.

When payments resume, some student borrowers who cured their defaults may have their entire balance forgiven, while the Biden administration’s Fresh Start initiative will also pull others out of default. But of those who put their loans back in good standing, more than half will still have student debt, and these borrowers may be at risk of defaulting again. To minimize the risk of redefault and its impact on credit, policymakers can permanently expand eligibility for loan rehabilitation and enroll more borrowers in income-driven repayment (IDR).

Who cured their student loan default during the payment pause?

Based on an analysis of credit bureau data, 29 percent of borrowers who were in default in August 2019 and still held student debt two years later had put their loans back in good standing (compared with 24 percent for the prior two years, 2017 to 2019). By linking the credit bureau data to American Community Survey data, we can see that borrowers in neighborhoods of color cured defaults at slightly higher rates. Of borrowers who cured their defaults, 62 percent held more than $20,000 of student debt as of August 2021, which means loan forgiveness won’t wipe out their balance even if they qualify for the maximum amount of debt relief.

Most Borrowers Who Cured Their Defaults Will Still Hold Student Debt after Forgiveness

Source:Urban Institute analysis of credit bureau data and American Community Survey data from the National Historical Geographic Information System.
Notes: BIPOC = Black, Indigenous, and people of color. Amount of student debt is measured in August 2021 and includes borrowers who cured their defaults between August 2019 and August 2021. A neighborhood has a predominant race/ethnicity if at least 60 percent of its residents are part of the named group. Predominantly BIPOC neighborhoods include any neighborhood where fewer than 40 percent of residents are white and non-Hispanic and is inclusive of predominantly Black neighborhoods.

If these borrowers’ finances haven’t substantially improved, they may be at risk of defaulting on their loans again after payments restart.

Who may be ineligible for loan rehabilitation after the payment pause?

Generally, borrowers can rehabilitate their federal student loan by making nine voluntary payments ($0 during the payment pause). Rehabilitation erases their default from their credit record, but borrowers can only use rehabilitation once. If they default again on the same loan, the default will stay on their credit record even if they exit default another way.

As part of the Fresh Start, borrowers who used loan rehabilitation during the payment pause will be eligible again in the future, which will protect many borrowers from the long-term negative credit effects of redefaulting.

My analysis suggests nearly a quarter of borrowers who put their loans back in good standing and hold more than $20,000 of student debt had defaulted multiple times on their loan before 2020, meaning they previously cured at least one default and may have used loan rehabilitation to do so. If they did use loan rehabilitation, they won’t have this safety net as an option if they default again.

Labor market discrimination and gaps in inherited wealth have led to racial disparities in student loan debt and default, which we can see in the default histories of borrowers who cured their defaults and hold more than $20,000 in debt. Borrowers who live in predominantly Black neighborhoods are more likely than those in predominantly white neighborhoods to have defaulted multiple times. This trend also holds for those with debt levels between $10,000 and $20,000, who won’t have their full balances forgiven if they didn’t receive a Pell grant. As such, limits on loan rehabilitation eligibility are likely to disproportionately affect Black borrowers and their ability to secure credit going forward.

Minimizing the risk of redefault and its impact on credit

Policymakers and student loan servicers have two avenues to prevent redefaults and their negative effects on credit.

First, they could ensure borrowers who may struggle to make payments are enrolled in an IDR plan. Borrowers in IDR plans can make payments based on the amount of income they earn rather than how much they borrowed, which can substantially reduce payments for many borrowers with low incomes. Policymakers can encourage eligible borrowers to enroll in the Biden administration’s newly proposed IDR plan when it becomes available and can make it easy to access and stay on the plan, as it reduces monthly payments more than the current IDR options.

Policymakers can also allow all borrowers to rehabilitate a loan a second time to address the risk of redefault when payments resume. Although the Fresh Start program will allow borrowers who rehabilitated a loan during the payment pause to retain eligibility to do so again, extending the policy to all borrowers would increase protections for those who rehabilitated loans before March 2020 (and those who use the option in the future). Permanently expanding eligibility for loan rehabilitation would allow borrowers’ credit to recover more quickly from a default and may prevent an exacerbation of racial disparities in access to credit after regular student loan payments resume.