A student loan debt tsunami is coming. Here’s how to minimize the impact.  

By the end of September, federal efforts to collect from student loan borrowers behind on their payments will resume after several years. Nearly 6 million borrowers — about the size of the population of Colorado — will again face significant financial penalties of the default system and a rocky path to getting back on top of their unpaid debt. 

Available data paints a clear picture of who these borrowers are and the challenges they face to repay their loans. For example, compared with student loan borrowers who are not in default, they’re significantly more likely to have annual household incomes under $25,000, experience volatile wages and unstable employment, not have a postsecondary credential despite accruing debt to earn one, and be older, typically between 45 and 59. 

At the same time, the most common reasons they cite for loan default are needing to repay other higher-priority debts, feeling overwhelmed and having unaffordable student loan payments. In short, the promise of higher education was unattainable for many of them, resulting in a cycle of debt and low wages.

Given their financial pressures, it is understandable why so many borrowers face loan repayment challenges. Take a moment to think about it. If you had to choose between your rent or mortgage and making a student loan payment, which would you pick? 

Although the Department of Education has rolled out meaningful changes in recent years to provide more borrowers access to affordable repayment plans, the collection system that will reactivate in October is nearly the same as before the pause.

Once collections resume, the government will take significant steps to recoup the defaulted debt, including garnishing a portion of borrowers’ wages, withholding tax returns and Social Security checks, barring access to additional federal financial aid and issuing fees on top of the principal and interest.

These penalties can be much more costly to borrowers than what they would likely be required to pay in some repayment plans, such as income-driven repayment, which cap the amount a borrower owes based on income and family size. (Borrowers lose access to income-driven repayment plans once their loan defaults.)

The collections system leaves borrowers with few viable options to get back on their feet financially and exit their default status by resuming active repayment. Most borrowers have only two realistic paths to coming out of default: rehabilitation or consolidation. 

Rehabilitation requires borrowers to make nine on-time payments within 10 consecutive months, while consolidation allows borrowers to roll their existing federal student loan into a new loan, which they are then responsible for repaying. 

Each pathway can typically be used only once, and past research details how arduous and lengthy each process can be for borrowers; as a result, many borrowers may default again until each pathway is exhausted, at which point they are stuck in default until their loan is repaid in full. 

It’s a counterproductive process, which can prevent even the most well-intentioned borrower from getting their loan back on track.

The Pew Charitable Trusts’ student loan initiative proposes three areas of default reform that the department should prioritize to create a more productive collections system:

1. Improve pathways out of default. The traditional pathways out of default are difficult to navigate and have contributed to very high redefault rates. An improved or new pathway should prioritize simplicity and speed for borrowers to minimize administrative hurdles, as well as streamline access to income-driven repayment plans that can make payments more affordable for lower-income borrowers.
2. Limit amounts to what borrowers would owe on a repayment plan. Current practices are counterproductive to getting borrowers back on track with payments and can push families further into poverty. For example, even important tax benefits such as the earned income tax credit can be seized by involuntary collections, and wage garnishments can exceed what a borrower would likely owe on an income-driven repayment plan.
3. Ensure that struggling borrowers can effectively navigate their options. To do so, the department will need to frequently monitor how borrowers are interacting with the system and what actions they take when faced with repayment barriers. For example, knowing how many borrowers consent to the new data-sharing tool, which automates income reporting for income-driven repayment plans and thus makes it easier to enroll and remain on these plans, will help policymakers and advocates identify where more targeted outreach and communications are most needed. 

The pathways for exiting default and the financial consequences of collections are decades old. Borrowers deserve an updated system that sets them up for long-term repayment success. The time to act is now.

Ilan Levine is a senior associate and Brian Denten is an officer with The Pew Charitable Trusts’ student loan initiative.