Federal student loan payments officially resumed over a year ago, ending over three years of paused payments to provide borrowers relief during and following the COVID-19 pandemic.
Beginning this month, the full consequences for late payments will take effect, including wage garnishment, tax refund seizures, and negative credit reports as borrowers face the return of student loan defaults.
According to the Department of Education:
“the Department is required to report late or missing payments for most borrowers to the national credit reporting agencies in January 2025, and their loans will enter default – triggering mandatory collections and other consequences in late 2025.”
Servicers Report Delinquency to Credit Bureaus After 90 Days of Missed Payments
The student loan payment pause and 12-month on-ramp period prevented borrowers from reaching default. Servicers placed borrowers into a forbearance status during the on-ramp period once they became 90 days delinquent, preventing negative consequences for missed payments.
The 12-month on-ramp ended on September 30, 2024. This means that borrowers who did not make their October, November, or December payments will be 90 days delinquent in January, so Servicers can then report delinquencies to national credit bureaus.
Delinquency negatively impacts credit scores which will prevent borrowers from qualifying for other lines of credit, housing, or even employment.
High Cohort Default Rates Expected this Year
Colleges that qualify for federal student aid are scored by their cohort default rate or CDR. A college’s cohort default rate is the percentage of students who end up defaulting on their loans within a certain period, usually three years. Groups of students are broken down into “cohorts” based on the dates they enter repayment.
Cohorts are named by the fiscal year they enter repayment. For example, the “2024 Cohort” are borrowers who entered repayment during between October 1, 2023 to September 30, 2024. The 2024 CDR will be calculated based on the percentage of borrowers who enter default within three years of entering repayment. Default occurs after 270 days of missed payments.
Colleges have enjoyed several years of 0% CDRs, since the 2020, 2021, and 2022 Cohorts couldn’t default during the three year COVID-19 payment pause or the 12-month repayment on-ramp. However, some of the 2023 Cohort and definitely the 2024 Cohort will see a rise in CDRs.
Student Loan Borrowers are Confused, Unwilling or Unable to Pay
Imagine a typical student loan borrower who entered repayment last year during the on-ramp period. That borrower has likely heard about student loan forgiveness and is unsure if they qualify. They’re also unsure about how to manage their repayment. The SAVE income-driven repayment (IDR) plan was launched, blocked, and now other IDR plans have been re-released.
A new incoming administration is likely to bring more chaos and confusion, so most borrowers are either unsure how to go about repaying their student loans, whether they should repay their student loans, or even unable to afford their student loan payments.
Default Aversion is Most Critical this Year for Colleges
Student loan borrowers will reach default by September of this year, which gives colleges time to step up their default aversion plans before it’s too late. A good default aversion plan should include:
- Clear and Consistent Communication: The best way to combat confusion is through clear and consistent communication. Borrowers need a resource they can trust to inform them about how to go about repaying their student loans and guiding them through the confusion over student loan policies such as forgiveness programs.
- Income-Driven Repayment Applications: IDR plans are still the easiest way for borrowers to afford their monthly payments, however there are multiple IDR plans to choose from so clear guidance is necessary. Online applications that clearly compare all plans will help borrowers make decisions.
- Easy Access to Student Loan Repayment Experts: Federal student loan servicers are doing everything they can, but consider their limitations. There are only thousands of agents to support a portfolio of over 40 million student loan borrowers; wait times can get very long. Borrowers should be able to call or chat with someone without a long wait.
In terms of CDRs, prevention is key. Partner with IonTuition today to put your student loan default aversion plan in place.