Academic journal article AEI Paper & Studies

Executive Summary

Academic journal article AEI Paper & Studies

Executive Summary

Article excerpt

Student loan default has attracted considerable attention from journalists and the research community over the past several years, as the Department of Education projects that more than a quarter of federal student loans to undergraduates will end up in default at some point. But less commonly discussed are the pathways that student borrowers follow after defaulting on a federal loan. In this report, we combine a comprehensive review of federal policies surrounding default with an analysis of post-default pathways using a newly constructed federal data set of student borrowers.

While default is common for student borrowers, it is far from a permanent status. Seven in 10 borrowers who default on a federal loan will exit default status within five years. Because defaulters tend to have small balances, around a third pay off their loans in full within a few years. Others resolve their defaults by rehabilitating or consolidating their loans. However, borrowers who exit default in these ways often fail to pay down their balances, meaning that default exit sometimes signifies little more than a status change. …

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