Jason D. Delisle of the American Enterprise Institute contributed to this post.

The number of student borrowers in default on their federal loans stands at more than 8 million, or about one in five borrowers whose loans have come due. This number might seem startling, but preventing defaults and helping borrowers resolve defaults does not require sweeping changes to student loan policy. Instead, progress could be made simply by reforming the byzantine rules and procedures that make the process of student loan default and resolution confusing and unfair.

In new reports out today from the Urban Institute and the American Enterprise Institute (AEI), we provide new evidence on the characteristics of borrowers who default on their student loans and the consequences of these defaults. Some of the findings are positive: for instance, we find that 70 percent of borrowers who default exit default status within five years, and more than 30 percent fully pay off their defaulted loans during that period.

But some of the findings suggest room for improvement. Many of those in default were in financial distress or behind on other debt before entering repayment on their student loans and fall into default despite safeguards designed to offer struggling borrowers relief. These findings indicate that policymakers can reduce student loan default rates—and mitigate the consequences of default—by simplifying and clarifying default processes and protections. 

How can we target access to resources to ensure students avoid default?

With the availability of multiple repayment options for federal student loans, including income-driven repayment (IDR) plans and the opportunity to put loans into forbearance or deferment, default rates should be low. Yet hundreds of thousands of borrowers default each year. Our data indicate that those who default are typically in financial distress and have fallen behind on other obligations, such as utilities or medical debt.

These borrowers might be eligible for relief from payments but don’t appear to be taking up this option. Policymakers need to identify new ways to notify distressed borrowers of their repayment options. For example, findings from the Urban Institute report suggest increasing exit counseling for borrowers with low credit scores (who have a higher risk of default) or automatically placing borrowers into IDR plans, as proposed by House Democrats’ Aim Higher Act and by the Trump administration. Policymakers could also consider full or partial discharge of loans based on other indicators of financial hardship, such as for those who have spent several years in a social safety net program.

How can we simplify the process of student loan default and recovery?

Students who default face several options for recovering from that default. They can pay their loan off in a lump sum (all at once or installments), they could consolidate or rehabilitate their loan, or they could take no action and watch their balance decline through wage garnishment or tax refund offsets. Surprisingly, borrowers who use one of the government’s default resolution policies, such as rehabilitation or consolidation, show little progress in paying down their debts afterward.

Each option carries its own costs through collection fees and additional interest. A borrower with a $7,000 loan, for example, can have all his collection costs waived under a settlement or pay as little as $9 in penalties if he chooses a rehabilitation. But if he clears his balance with periodic voluntary payments, his collection fees could exceed $2,000. Only one of the myriad options—the low-fee option that does not require he pay off the loan—clears his credit report of the default.

Analysis from the AEI report suggests that default resolution policies are complicated and inequitable. These policies are often counterintuitive and include perverse incentives for borrowers in how they resolve their defaults. Policymakers should simplify the process of student loan default, creating a system that makes consequences clear and allows for a faster debt resolution. This could be accomplished by streamlining the number of default resolution options and making collection fees transparent.

What data on student loan defaults should we track?

Although the US Department of Education has improved its reporting on the status of student loans, there is still much we do not know about federal student loan defaults. The lack of information on why borrowers default and what happens after showcases the need for transparency. Findings from the Urban and AEI reports indicate that more data are needed to better understand the consequences of defaulting on a student loan, and students and taxpayers deserve to know how the student loan programs they fund grapple with nonpayment.

We can’t adequately address student loan defaults without a strong understanding of the choices defaulters face as they go through default resolution and in the broader context of their financial situation. Policymakers should demand more information on how borrowers enter default, how current statutes are interpreted by collections agencies, and how borrowers fare after leaving default.