The average student loan borrower takes out $29,100 to pay for college, according to College Board’s Trends in Student Aid 2022 report. In 2022, 16% of borrowers had their student loans in default. The amount of federal loans in default represents 10% of the total federal student loan portfolio, or $146.8 billion out of $1.48 trillion.
Federal student loan default, which occurs after 270 days of missed payments, is most common among borrowers with low balances. The three-year default rate for borrowers who owe $5,000 or less is 24%, while it’s just 7% among those who owe $40,000 or more. Overall, the average balance of defaulted student loans is $21,600.
The History and Importance of the Default Rate
What’s known as the three-year default rate is a highly watched number because it’s the figure the U.S. Department of Education uses to determine if colleges and universities qualify to receive federal student aid. If a school’s default rate exceeds a certain benchmark three years in a row, it could lose eligibility for Title IV funding.
The student loan default rates have generally trended down over the last two decades. In March 2020, the Department of Education paused collections on most student loans in default. It’s also offering a Fresh Start program that allows borrowers to easily get their loans out of default and back into good standing.
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What is the Average Student Loan Default Period?
While the federal government focuses on the three-year student loan default rate, the rate may be higher over the life of the loan. For instance, EducationData.org finds that 25% of borrowers default within five years of when their repayment starts.
Students who were enrolled in private for-profit colleges are the most likely to have student loans in default, data shows.
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The Difference Between Defaulting on a Loan and Being Delinquent
Borrowers participating in the Federal Direct Loan program or the Federal Family Education Loan (FFEL) program are considered in default if they miss nine months or 270 days of payments. Borrowers can face a number of serious consequences if they default on a loan, including losing the opportunity to defer payments or choose a repayment plan.
It may also damage your credit, and your tax refunds may be withheld and applied to what you owe on your loans. The government could even garnish a portion of your wages to apply to your loan. Finally, your loan holder can sue you, and if that’s the case, you may be responsible for the court fees.
With a delinquency, you still have time to start making payments again and restore your relationship with your lender. You’re considered delinquent on federal student loans the day after you miss your first payment, and you’ll remain delinquent until you resume payments and make up the past due amount.
If it’s been 90 days since your last payment, the lender can report you to credit agencies, and those missed loan payments can go on your credit report, which can affect your ability to borrow in the future. And with a bad credit report, you may have trouble getting credit cards, home loans, and even arranging for utilities or homeowner’s insurance.
What Options are Available to Make My Loans More Affordable?
To avoid becoming part of the student loan default rates, it’s important to take action. If you are delinquent on your student loans or think you may be heading that way, you can seek deferment of your payments, or forbearance, which is a federal benefit to stop making payments for a period of time. However interest may still accrue. You could also choose a federal income-based repayment program that bases your monthly payment on your income and family size.
Another option is to refinance your student loans with a private lender. With student loan refinancing, you may be able to get a lower interest rate or more favorable terms to help reduce your monthly payments. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)
Want to see how much you might save? You can use a student loan refinance calculator to see if refinancing makes sense to you.
Keep in mind that if you need access to federal protections and programs, such as income-driven repayment programs, refinancing federal student loans likely wouldn’t make sense for you. That’s because when you refinance federal loans, they become ineligible for these special benefits.
As you’re pondering your options for refinancing, a student loan refinancing guide can be helpful for walking you through the process.
If, after doing your research, you decide that now is the right time for refinancing, you’ll want to shop around for the best rates and terms. SoFi offers loans for student loan refinancing with low fixed or variable rates, flexible terms, and no fees. And you can find out if you prequalify in just two minutes.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
Student Loan Refinancing
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
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