Most Americans would share that this year hasn’t been the most economically advantageous for them. Between inflation, high interest rates and the resumption of student loan payments, many have found it difficult to manage their existing consumer debt.

As a result of the economic turbulence and unexpected headwinds, loan delinquency and default rates are at an all-time high. While this is understandable given the impact the macroeconomic environment has on consumers, most young adults asked didn’t know what loan default was.

What can this tell us about lending trends? The answer is nuanced, but student loan repayment starting backing up, coupled with a lack of financial education, may be to blame. If anything, it harkens to the idea that increased financial literacy is necessary and that American consumers must understand the ramifications of not paying down debt and over-borrowing.

2023 loan default rates rise as inflation remains high

Loan default occurs when you regularly miss your monthly payments for a set amount of time. When your balance defaults, it gets sent to a debt collection agency, who will then attempt to collect the unpaid debt.

What counts as default will ultimately depend on the lender. However, after an extended period of consecutively missing payments — typically 90 days or more — the lender will notify you if your loan has entered into default status.

While inflation is slowly cooling from a record-breaking 2022 high, Americans still feel the aftershocks of such a high-rate economy. Prices are still high, and budgets have been tight. In fact, a 2023 Bankrate survey found that more than 3 in 5 financially insecure Americans reported that high inflation is what’s keeping them from being financially secure or comfortable.

Fitch Rating’s June report found this increased inflationary pressure is to blame for an uptick in loan default rates. Not only is this stress contributing to higher default rates, but the national central bank (the Federal Reserve) has been raising rates to tame inflation.

S&P Global asserts that due to the lack of rapid economic growth, the leveraged loan debt rate is expected to climb to a near-record-breaking 2.75 percent by June 2024. “Restrictive primary markets have reduced access to capital, and we expect both liquidity and refinancing risk to increase over the next 12 months,” its Global Ratings report reads.

According to IMF’s Monetary Policy research, indications of consumer vulnerabilities — credit risk — have surfaced. “Making debt more expensive is an intended consequence of tightening monetary policy to contain inflation,” the report reads. “The risk, however, is that borrowers might already be in precarious financial positions financially, and the higher interest rates could amplify these fragilities, leading to a surge of defaults.”

Rates expected to remain high despite economic conditions

The Federal Reserve has kept interest rates stable for two meetings in a row. Given that the Fed hiked rates to a level not seen in 22 years at a historically fast rate, this slowdown could be interpreted as a much-needed rate reprieve. However, the future of interest rates is, at best, uncertain.

According to Bankrate’s Q3 Economic Indicator Survey, while there isn’t an exact date and time we can point to, there’s a good chance that the Fed could act within the new year. In fact, 94 percent of economists who responded to the survey predict that the Fed could begin cutting rates in 2024. These assertions align with the Fed’s predictions, which show that rate hikes aren’t predicted until 2024 at the very least.

This means borrowers can anticipate high borrowing costs to persist well into the new year. This brings increased odds of default. “Excess savings in advanced economies have steadily declined from peak levels early last year that were equal to 4 percent to 8 percent of gross domestic product,” IMF’s report reads. “There are also signs of rising delinquencies in credit cards and auto loans,” it concludes.

Gen Z, Millennials have seen most dramatic uptick in loan defaults since 2022

The New York Federal Reserve defines payments later than 90 days or more as a “serious delinquency”. Once a borrower hits this point, most lenders would declare the loan as in default status. According to the New York Fed’s Consumer Credit Panel, these “serious delinquencies” started increasing across every age group in Q1 2022.

However, Millennial and Gen Z borrowers aged 18 to 29 years old have seen the largest increase in default levels by a wide margin. All other age groups, which range from individuals aged 30 years to those aged 70 years and older, have seen increased default levels since 2022.

However, the amount of debt that has transitioned into serious delinquency has grown to nearly over 2 percent for Millennial and Gen-Z borrowers, while the rest of the age groups have delinquencies that make up roughly 1 to 1.5 percent of their debt.

Student loan repayment a plausible factor in default rates

“I can only speculate why defaults are suddenly up in this age group, but I wonder if student loans play a part,” says Howard Dvorkin, CPA and chairman of Debt.com. “After three years of frozen payments due to the pandemic, October marked the thaw. Coupled with inflation, that could be the one-two punch that drove up defaults,” he adds.

Christopher Naghibi, Esq., executive vice president and chief operating officer at First Foundation Bank, asserts that default rates could be due to the economic environment millennials and Gen Zers have lived through and how their experiences may differ from the older generations.

“I think the younger generation gets painted in a bad light with some of the default data,” he says.

The younger generation is facing significant home affordability gaps and slow wage growth. However, while every borrower across the nation is technically experiencing the same economy, Naghibi claims that 19- to 28-year-olds have been hit the hardest.

“You [19 to 28-year-olds] came into adulthood in one of the most prosperous economic times in American history,” he says. “Rates only went down, interest rates on loans gave you tremendous buying power, you could take risks on starting a business and there were such little headwinds because the economy was so flush with cash.”

However, Naghibi attributes the pandemic-induced economic uptick to a “very peculiar expectation level” when it came to the younger generation’s ability to garner fiscal success. In tandem with the previous promise — and subsequent lack — of federal student loan debt, he asserts this is a major player in why the data looks as it does.

“Many 19 to 28-year-olds had hoped for student debt forgiveness,” he says. “Payments started again in September of 2023, and by October, when the first payment became due again, the damage had already been done.”

Most adults unsure when asked about loan default

I recently set out to see how many of my friends, acquaintances and family members knew what loan default was. To make the findings as impartial as possible, I asked adults of nearly every life stage and age, including young professionals, college students, homeowners (aged late 20s and up), middle-aged borrowers and older adults.

I asked every person the same question: “Do you know what defaulting on a loan means?” and to my surprise, most didn’t know. Out of the 20 asked, 15 reported not knowing, while five confidently said they were aware and gave me the correct definition. Most answers (nearly half) were partly correct, but nearly all respondents were unaware of the financial ramifications of default and what it could mean for their credit score.

Experts: results can be attributed to general “lack of education”

The phrase “adulting” encompasses a general feeling that most young adults nowadays feel. Getting seemingly thrown into the ‘real world’ and having to make important financial decisions with little to no formal education on the matter can be a stressful experience.

Given that the terms and conditions, balance details and the loan agreements involved with taking out a loan aren’t familiar to most borrowers, it can be easy to overlook some of the details. What’s more, most public institutions across the nation don’t provide financial education.

It’s totally unsurprising that anyone under 30 doesn’t know what a default is, only 15 states teach any sort of financial literacy in school.

— Howard Dvorkin, CPA and Chairman of Debt.com

Naghibi echoes a similar sentiment when asked about the lack of general knowledge around loan default and its financial ramifications. “Again, I don’t blame the 19- to 28-year-olds,” he says. “They don’t teach financial literacy in school. ”

How to prevent loan default

Emergencies and unexpected circumstances arise for everyone and can derail your financial goals and plans. But thinking ahead and making a budget can save your loans from entering into default.

Avoiding default ultimately starts as soon as you make the decision to take out a loan. Look through your budget and determine exactly how much you can afford each month on a payment, accounting for possible emergency expenses and savings.

Compare multiple offers and prequalify for as many loans as possible. If you’re unsure about your ability to make the payments and have no other financing option, ask the lender, bank or financial institution about hardship relief options or alternate repayment plans.

While these options won’t eliminate your payment responsibility, they can take some of the immediate pressure off of your wallet and help prevent defaulting on your balance.

What to do if you’ve defaulted on a loan

If you have received notice that your loan is in default, there are some things you can do to help get your finances back on track. Firstly, contact your lender to explain your situation. They may have programs or payment plans to help you regain your account’s good standing status. Mark Hamrick, Senior Bankrate analyst and Washington Bureau Chief, can’t stress this enough.

There’s really no such thing as over-communicating with a lender when we’re talking about the risk of, or actually falling, behind on a payment, — Mark Hamrick, Senior Bankrate analyst and Washington Bureau Chief

If you don’t have multiple loans or if your existing loans all have high interest rates, you can contact a credit counselor or work with a debt relief company. A credit counselor will help you create a debt repayment plan and can provide financial counseling and management skills. A debt relief company works on your behalf — for a fee — and negotiates with your creditors to lower or cancel any existing debt (typically $10,000 or more).

While working with a relief company can have benefits, there are also some major drawbacks to be aware of. For one, most debt relief companies will require you to stop making payments toward your debt, and creditors aren’t legally obligated to work with an outside company. Another downside is the hefty fee that the companies tack on, typically between 15 and 25 percent of the amount settled.

Regardless of your choice, make sure you act quickly, contact your lender immediately and establish a financial plan to help you get back on your feet. The longer you wait, the more impact it will have on your credit score.