For Students With College Debt in Default, it’s Time to Pay the Bill

by Bill Cass of Franklin Templeton, 5/9/25

For students with outstanding college debt on hold since the COVID-19 pandemic, it’s time to start paying again.

The US Department of Education announced plans recently to resume the collection of defaulted student loans starting May 5, 2025. Many borrowers have had a hiatus from making payments since March 2020 due to rules put in place during the pandemic.

Today, more than 42 million borrowers owe more than $1.6 trillion in student debt, according to the Department of Education. More than five million borrowers are in default and many borrowers have been in default for more than seven years. About four million borrowers are in late-stage delinquency (91-180 days). As a result, there could be almost 10 million borrowers in default in a few months, representing nearly 25% of total federal student outstanding loans, the department stated in its announcement.

Only 38% of borrowers are in repayments and current on their student loans. Most of the remaining borrowers are behind on their payments, in an interest-free forbearance, or in an interest-free deferment. A small percentage of borrowers have a six-month grace period, the department noted.

How defaults grew

The federal government put a pause on collections during the COVID-19 pandemic. At that time, if your loan was eligible, the federal government automatically paused loan payments and set the loan interest rate to 0% from March 13, 2020, until Sept. 1, 2023.

The Biden administration announced multiple extensions on the repayment pauses. Most borrowers were required to begin paying their loans back again in October 2023. However, the administration kept the collection pause in place. Importantly, loan holders need to be aware of the potential consequences of missing student loan payments, including a negative impact on credit rating or even wage garnishment.

Next steps for borrowers in default

While facing a renewed repayment obligation, student loan borrowers still have options. Here are some potential options for borrowers to consider.

Student loan forbearance

A forbearance is a temporary delay in making required payments. However, interest will still accrue. There are different types of forbearance. To apply, you must identify the type of forbearance you are seeking, complete forms and gather documents to verify you meet the eligibility criteria in documents sent to your federal student loan servicer. There are two main categories, including general and mandatory. For general forbearance, you may need to demonstrate reasons why you cannot make payments on time such as financial difficulties, medical expenses or changes in employment. You may be granted forbearance for up to 12 months, but ultimately the loan servicer decides whether forbearance is granted or not. In the case of mandatory forbearance, the loan servicer is required to grant forbearance if certain requirements are met. Lastly, in some cases a loan holder may pursue deferment which, similar to forbearance, allows the loan holder to pause payments. One important distinction is that in the case of deferment, depending on the type of loan, interest may be suspended.

For more details, view the Department of Education’s page on “Student Loan Forbearance.”

Income driven repayment plan (IDR)

Borrowers may want to consider an income-driven repayment (IDR) plan that bases your monthly student loan payment on income and family size. Monthly payments are generally a percentage of discretionary income. Each year, you will need to update your income and family size information to recertify your plan. By the end of the repayment period, any remaining balance that is not paid off may be forgiven. Note that private student loans are not eligible for federal IDR programs. There are several different types of IDRs, and it is important to consult with a financial professional for advice.

Public Service Loan Forgiveness (PSLF)

If you are employed by a government agency or not-for-profit organization, you may be eligible for the PSLF program, which could forgive the remaining balance on your (federal) Direct Loan. To apply, you need to be working full-time for an eligible employer, and you would have to make the equivalent of 120 qualifying monthly payments under an accepted repayment plan. All IDR plans are considered qualified repayment plans. To learn more about this program, identify eligible employers, and see how to apply, visit the PSLF site.

Federal loan consolidation

Multiple federal student loans may be consolidated into a single loan through the Department of Education’s Direct Consolidation Loan program. A consolidation provides the borrower with a longer repayment period, which generally reduces the size of monthly payments. To be eligible, the loan status must be within a grace period, or you are actively repaying the loans. If you are in default, you will need to make an approved repayment arrangement before consolidating. You could also set up the consolidated loan through an IDR plan. For more information on the program and how to apply, explore “Direct Consolidation Loan Application.”

Saving takes on heightened priority for future planning

For many years, graduates have cited the burden of college debt as a financial obstacle. Many young workers have noted college debt is a barrier to saving for retirement or making a down payment on a home.

With less federal student aid available, higher interest rates, and the current focus on reducing government spending, it is more important than ever for families to save for college.

Considering the landscape for loans, many families may turn toward saving and seek out tax-advantaged vehicles like 529 college plans to cover more college costs.

A 529 savings plan can help families meet their college tuition goals and take advantage of tax benefits.

529 plans offer tax advantages

Savers pay no federal income taxes on account earnings while the account is invested. And there are no federal income taxes when the money is withdrawn to pay for qualified education expenses.

The account owner retains control over withdrawals for the life of the account. In most cases, contributions to the account can be removed from your estate for tax purposes while retaining control over the assets.

Consult with an advisor

529 college savings plans can also be invested to align with savings goals. It is important to meet with a financial advisor to see how a 529 plan may fit in with your overall college saving strategy.

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Posted in College Savings, Wealth PlanningTagged 529 college plan, college loans, college savings, default loans, department of education, forbearance, IDR, loan consolidation, repayment plan, student debt