Financial Consequences of Student Loan Delinquency, Default, and Servicer Quality 

Abstract:  Student loans are now the third largest form of household debt, and nearly 6 million federal student loan borrowers are in default. Student loans cannot be discharged in bankruptcy, and the federal government has unique levers for collecting on defaulted debt, leading to potentially severe financial consequences for borrowers. Using consumer credit panel data, I examine the credit market consequences of student loan delinquency and default and the role that student loan servicers play in contributing to borrower outcomes. I exploit random assignment of student loan borrowers to student loan servicers to study the direct effect of servicers on borrowers’ credit outcomes and to isolate variation in the likelihood of default that is not correlated with borrower characteristics. I find that being assigned to a higher-default servicer increases a borrower’s likelihood of default by approximately 6%. However, there is a precisely estimated null effect of servicer assignment on measures of borrowers’ likelihood of financial distress, credit access, and zip-code characteristics. These findings suggest that averting a servicer-induced default does not yield considerable benefits for marginal borrowers’ credit outcomes, but that servicers are meaningful drivers of student loan repayment outcomes.