Lori Meadows
Student loan debt is a significant issue in the United States, with millions of borrowers struggling to make their monthly payments. While some people may choose not to pay down their student debt due to financial difficulties or a disagreement with the system, others may be unaware of the consequences of defaulting on their loans. The US Department of Education has implemented initiatives to assist borrowers in repayment, such as the temporary on-ramp period, which prevents defaulted loans from being reported to credit agencies or sent to collections. However, if borrowers continue to miss payments, they risk defaulting on their loans, which can lead to negative consequences, including a lawsuit, wage garnishment, and a negative impact on their credit score.
| Characteristics | Values |
|---|---|
| Number of borrowers in default | 42.7 million |
| Amount owed by borrowers in default | $1.6 trillion |
| Number of borrowers who have not made a monthly payment in over 360 days | 5 million |
| Number of borrowers in late-stage delinquency | 4 million |
| Number of borrowers unable to begin repayment due to processing pause | 1.9 million |
| Number of borrowers who could face penalties due to Trump administration changes | 2 million |
| Average difference in annual income between white and Black households beyond a bachelor's degree | $25,000 |
| Income threshold for individuals filing taxes individually | $125,000 |
| Income threshold for married couples filing taxes jointly | $250,000 |
| Interest rate on student loans | 7-8% |
| Amount owed in student loans by an individual with a master's degree from Northwestern | $70,000 |
| Amount owed in student loans and other debts by a journalist | $100,000+ |
| Number of US borrowers skipping student loan payments | Millions |
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What You'll Learn
People are not paying due to high interest rates and compounding interest
Student loan debt is a significant issue, with millions of borrowers in default. While some people are unable to pay due to financial difficulties, others choose not to pay despite having the means to do so. High interest rates and compounding interest are major factors contributing to this issue.
When individuals take out a student loan, they agree to pay back more than just the borrowed amount. This additional amount is the interest, which is the cost of borrowing money. Interest rates on student loans can vary, with federal loans typically offering lower rates than private loans. For example, an individual with $6.5k in unsubsidized loans at a 2.75% interest rate is still a minimal amount compared to others. In contrast, private student loans can have interest rates as high as 14.43% on average.
Compounding interest further increases the debt burden. Interest accrues daily and is typically added to the loan balance monthly. Once it is capitalized, borrowers end up paying interest on a higher amount, causing their debt to grow even faster. This can lead to a cycle where the debt becomes increasingly difficult to repay.
To make matters worse, some borrowers face consequences such as wage garnishment and negative impacts on their credit scores. Additionally, those who default on federal student loans may lose eligibility for future federal student aid. The weight of these repercussions can hinder borrowers' abilities to get back on track with their loan payments.
To address the challenge of high interest rates and compounding interest, borrowers can make extra payments whenever possible and ensure that these payments are applied to their highest-interest loans first. Additionally, staying in communication with the loan servicer and exploring repayment plans or loan forgiveness programs can help alleviate the burden of interest over time.
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Some are unable to pay because of unemployment and other debts
Dealing with student loans when unemployed is extremely stressful. If you are unemployed, you may be eligible for a deferment or forbearance of your loans, and calling your lender may lead to lower payments. A deferment allows you to temporarily stop making student loan payments. Federal student loans offer deferment, and private loan providers may also offer deferment in times of unemployment. With federal loans, you are eligible for deferment while you are unemployed or unable to find full-time employment for up to three years. During deferment, you are not responsible for paying interest on certain loans, such as the subsidized portion of Federal Family Education Loans (FFEL) Consolidation Loans.
If you are struggling with more than just student loans, you can take a free screener to find out if you qualify for Chapter 7 bankruptcy. Student loan consolidation lets you combine multiple federal student loans into one new loan, simplifying repayment because you will have just one monthly payment and one loan servicer. However, consolidating will reset your progress if you are already working towards Public Service Loan Forgiveness (PSLF). It is important to note that federal consolidation cannot be used to combine private loans, and consolidation is not the same as refinancing. Refinancing is done through a private lender and can cause you to lose federal protections like income-driven repayment or forgiveness options.
If you are unemployed and have an income-based repayment plan, you can request that your monthly payment be recalculated to reflect your loss of income. You can list your current income as zero on your online application. It is important to contact your private loan lender and inform them that your finances have drastically changed.
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Others are unaware of their payment options and plans
Many student loan borrowers are unaware of their payment options and plans. This is due in part to a lack of communication and outreach from loan servicers and the government. For example, the US Department of Education's Office of Federal Student Aid (FSA) has not collected on defaulted loans since March 2020 and has kept borrowers in a state of limbo regarding their loan obligations. Similarly, the previous administration failed to process applications for income-driven repayment plans and instead pushed for loan forgiveness. This has resulted in a backlog of applications and a lack of clarity for borrowers.
Additionally, some borrowers may not be aware of the different repayment plans available to them, such as Income-Based Repayment, Income-Contingent Repayment, or PAYE. These plans can help make loan payments more manageable for borrowers, but they may not know they exist or how to enroll. There is also a new Loan Simulator and AI Assistant (Aiden) that can help borrowers understand their options and make informed decisions about their loans.
The FSA has recognized the need to improve communications with borrowers and has committed to keeping them updated with clear information about their payment options. They plan to conduct outreach through emails, social media, and extended servicer call times to provide resources and support to borrowers. However, some borrowers may still slip through the cracks and not receive the information they need to make informed decisions about their loans.
It is important for borrowers to stay informed about their loan obligations and to seek out information about their repayment options. This includes staying in touch with their loan servicer, keeping good records, and being aware of the potential consequences of missing payments or defaulting on their loans. By being proactive and informed, borrowers can better navigate the student loan repayment process and avoid negative impacts on their financial well-being.
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Some borrowers are choosing to spend their money elsewhere
The repayment of student loans has been a contentious issue, with the Biden-Harris Administration's efforts to protect borrowers facing criticism for shifting the burden to taxpayers. As of April 2025, the Trump administration resumed loan collections, enforcing wage garnishment and impacting the credit ratings of millions of borrowers. The previous pause on payments and the subsequent resumption have created confusion and anxiety among borrowers, who now face the challenge of significant monthly payments and the potential consequences of defaulting on their loans.
The economic impact of student loan debt is significant, with 42.7 million borrowers owing more than $1.6 trillion in student debt in the United States. Of these, approximately 5 million borrowers have not made monthly payments in over a year, and nearly 4 million are in late-stage delinquency. The default rate on federal student loans can have severe repercussions, including lawsuits, negative credit scores, and the loss of eligibility for federal student aid.
While some borrowers may strategically choose to prioritize other expenses over student loan repayment, the long-term financial implications can be substantial. The accumulation of interest can rapidly increase the total debt owed, and the threat of legal action and negative credit ratings looms for those who consistently miss payments. As a result, borrowers are caught between meeting their basic needs and facing the consequences of delinquent student loan payments.
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Many are unable to pay due to low income
Student loan debt has grown enormously in recent years, becoming one of the largest forms of consumer borrowing in the United States. The Biden-Harris Administration's efforts to cancel some student loan debt were shut down by the Supreme Court. As a result, millions of borrowers are in default on their student loans, with more than 5 million borrowers having not made a monthly payment in over 360 days.
Many people are unable to pay down their student debt due to low income. As of 2019, 2.5 million young households had a student debt-to-income ratio surpassing 0.5, with an average ratio of 1.03 for the bottom 50% of earners. In 2022, debt holders with an annual income of less than $33,769 had an average student loan debt of $32,518. This income group is more prone to financial distress, including late payments, credit denial, and foreclosure, especially if they did not complete a degree.
Graduates with debt are more likely to choose higher-paying positions and less likely to opt for lower-paying public interest roles. Additionally, there is a racial disparity in student borrowing, with Black college students generally taking on more debt than white students and facing lower pay upon graduation due to systemic discrimination and lower levels of family wealth. Black graduates experience a lower pay premium than their white counterparts.
To address these challenges, some strategies have been proposed. These include income-driven repayment plans, such as the Public Service Loan Forgiveness (PSLF) program, which allows borrowers to pay an amount proportional to their income. Combining income-driven repayment with public service employment can be a strategy to eliminate debt without overwhelming finances. Employers can also offer repayment assistance, and under the Consolidated Appropriations Act of 2021, they can make tax-free contributions of up to $5,250 toward each employee's loan repayment. Additionally, the Department of Education has implemented a temporary "on-ramp" period from October 1, 2023, to September 30, 2024, during which missed monthly payments on federally-owned student loans will not be reported to credit reporting companies or placed in default. This initiative aims to support borrowers in returning to repayment or getting out of default.
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Frequently asked questions
If you stop paying your student loan debt, your loan will eventually enter default. This can have a negative impact on your credit score and may result in legal consequences such as a lawsuit, wage garnishment, or the loss of eligibility for federal student aid.
Some people are unable to pay down their student debt due to unemployment or financial difficulties, such as high rent and living costs. Others have chosen to prioritise other financial commitments, such as rent, retirement, or medical expenses. Some borrowers also took advantage of the three-year repayment pause to set up their lives, during which interest was still accruing.
Student loan debt that is not repaid becomes a burden on taxpayers. As of 2025, 42.7 million borrowers owe more than $1.6 trillion in student debt, with only 38% of borrowers current on their repayments.
Defaulting on federal student loans can result in wage garnishment, the loss of eligibility for federal student aid, and negative impacts on credit scores.
Yes, there are alternatives to paying down student debt in full. Some options include exploring repayment plans, loan forgiveness programs, and income-driven repayment plans. Additionally, depending on your income and tax filing status, you may be able to claim up to $2,500 of student loan interest on your tax return.
