Student Loan Collections Resume May 5

The federal government has now restarted collecting defaulted student loan payments from millions of Americans – the first time since the pandemic began.

In March 2020, the Department of Education (DOE) suspended student loan payments to help Americans facing job losses during economic shutdowns. While payments officially resumed in September 2023, servicers were instructed not to report late payments to credit bureaus until October 2024, and only for borrowers 90+ days past due.

According to the DOE's recent press release, just 38% of the nearly 43 million student loan borrowers are current on payments. Over 5 million borrowers haven't made payments in more than a year and are already in default, while another 4 million are in late-stage delinquency (91-180 days late). This means nearly 10 million borrowers – representing about 25% of the federal student loan portfolio – could soon be in default.

"Consumers may find themselves shocked by the dramatic and immediate impact that a default can have on their credit scores," warns Joshua Trumbull, senior vice president and head of consumer lending at TransUnion.

Recent defaulters have seen their credit scores drop by an average of 63 points. For borrowers with excellent credit (scores above 780), serious delinquency has caused scores to plummet by as much as 175 points.

The Treasury Offset program will now begin garnishing federal and state payments – including tax refunds and Social Security benefits – from defaulted borrowers. The DOE also plans to start wage garnishment this summer.

This return to pre-pandemic collection practices comes at a challenging time for many Americans already struggling with tight finances. With tariff-related price increases adding pressure to household budgets, families may need to cut back on spending or turn to credit cards and Buy Now, Pay Later options just to cover basic needs.

The stakes are high for our economy: consumer spending drives nearly 70% of GDP, meaning these financial strains could trigger a broader economic slowdown and intensify concerns about a potential recession.

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By Shelly Williams