Experts have been warning for months that student loan borrowers missing payments could trigger a “default cliff.” According to recent reports, a cliff is now approaching.
With the reinstatement of federal student loan delinquency reporting on consumer credit earlier this year, serious delinquency rates have skyrocketed and are now near all-time highs, according to credit score developer FICO’s September Credit Insights report.
A separate analysis by the Congressional Research Service last month based on Education Department data found that about 5.3 million borrowers are in default and another 4.3 million are in “late delinquency,” or 181 to 270 days late on their payments. Payments made 270 days past the due date will be considered in default.
Justin Begley, an economist at Moody’s Analytics, told CNBC that too many borrowers are already deeply delinquent and “if these borrowers don’t start making payments soon, we’re going to see a significant increase in defaults.”
Begley predicts that “many borrowers are expected to default in the coming months.”
A separate study in May by the Pew Charitable Trusts also found an impending “default cliff,” or “another wave of student loan defaults, putting borrowers’ financial stability and taxpayers’ investments at risk.” Additionally, Pew’s previous report found that defaulting borrowers often find themselves in cycles of nonpayment that are difficult to break out of, with two-thirds defaulting more than once.
According to the Congressional Research Service, the default cliff many are currently facing is generally due to many borrowers not making payments on their loans after September 30, 2024, when the post-pandemic relief period for past-due borrowers officially ends. Those who have not made payments since then may be in default as of late June.
Borrower “bubble” heading towards default
Higher education expert Mark Kantrowitz said there is currently a “bubble” of borrowers going through each stage of delinquency.
He said many of the borrowers in this bubble defaulted before the pandemic and used government bailouts to get their loans back to “current” status by the end of 2024. “I expect these borrowers to default once they are 270 days past due, after which delinquency and default rates will return to previous levels.”
Student loan borrowers often default on their payments because they can’t afford to pay their monthly expenses. But recent court cases and President Donald Trump’s “Big Beautiful Bill” have reduced repayment options that cap monthly payments based on income.
Income-based repayment plans (IBR) are now considered the best option for borrowers looking for affordable repayment options, experts say.
Risk of “financial bankruptcy”
Sen. Elizabeth Warren, D-Mass., and other lawmakers also warned of a worsening wave of defaults in a new letter to the U.S. Department of Education.
Drastic cuts to the Department of Education and the passage of President Trump’s “big, beautiful bill” are reducing access to debt relief and increasing the likelihood of default, Warren said in a letter to U.S. Secretary of Education Linda McMahon late Tuesday, shared exclusively with CNBC.
The letter was also signed by Senate Majority Leader Chuck Schumer (D-N.Y.), Sen. Angela Alsobrooks (D-Md.), and Sen. Kirsten Gillibrand (D.Y.). “The devastating increase in past-due payments threatens not only individual borrowers, but the entire economy by suppressing consumer spending and locking families out of housing and other economic opportunities,” he and Representative Ayanna Pressley (D-Mass.) said in a statement.
The Department of Education “should work with Congress to avert this economic disaster,” the lawmakers wrote. They write that the Department of Education should clear the backlog of income-based repayment applications and create a temporary, interest-free default deferment program for borrowers.
Warren also said in an email to CNBC that “millions of Americans will be plunged into economic ruin if the administration fails to act.”
As of the end of August, the Department of Education had nearly 1.1 million applications from borrowers seeking to participate in income-driven repayment (IDR) plans, according to court records from mid-September.
The Ministry of Education did not respond to an emailed request for comment. “Due to appropriations lapses, you are currently furloughed. We will respond via email as soon as government functions resume,” the automated response said.
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