Student loan collections hit borrowers hard

[UNITED STATES] The U.S. Department of Education has announced that, starting in early June, thousands of student-loan borrowers in default will see their federal benefits—including Social Security—subject to garnishment. This follows the Trump administration’s decision to end the pandemic-era pause on student-loan collections, which had protected borrowers from collections and negative credit reporting since 2020. Notices have already gone out to nearly 200,000 borrowers, with all 5.3 million defaulted borrowers set to be notified of potential wage garnishment later this summer.

Default and Delinquency on the Rise
Borrowers typically enter default after missing payments for more than 270 days. Recent data from the New York Federal Reserve shows a sharp increase in serious delinquency rates, rising from 0.8% in 2024 to over 8% in 2025. This surge means more borrowers are at risk of default and subsequent collections actions, including garnishment of wages and federal benefits.

Limited Options for Borrowers

Those in default have options to return to good standing, such as loan rehabilitation—which requires nine timely payments over ten months—or loan consolidation. However, these processes can be lengthy and difficult for financially strained individuals. Borrowers like James Southern, a 63-year-old facing serious delinquency, express deep concern about their ability to manage basic expenses if their benefits are reduced, highlighting the real-world impact of the policy shift.

Implications

For Businesses

Employers may see increased financial stress among workers, especially older employees who are delaying retirement due to garnished Social Security benefits. This could affect workplace morale, productivity, and long-term workforce planning as more employees are compelled to work past traditional retirement age.

For Consumers

Borrowers in default face immediate financial hardship, with reduced disposable income due to garnished wages or benefits. This can lead to increased reliance on social services, reduced consumer spending, and heightened financial insecurity, particularly for older Americans who depend on Social Security as a primary income source.

For Public Policy

The resumption of aggressive collections highlights ongoing challenges in the student-loan system, especially for vulnerable populations. Policymakers may face renewed calls to reform default and collections processes, implement more robust safety nets, or revisit the structure of federal student lending to prevent long-term financial harm to borrowers.

What We Think

The decision to resume student-loan collections and garnishment of federal benefits marks a significant policy pivot with wide-reaching consequences. While restoring accountability to the lending system is a legitimate goal, the abrupt end to pandemic-era protections risks pushing millions of Americans—many of them older or financially fragile—into deeper hardship. The spike in delinquency rates underscores the ongoing volatility in the student-loan market and suggests that many borrowers are still struggling to recover from pandemic-related setbacks.

“Borrowing money and failing to pay it back isn’t a victimless offense. Debt doesn’t go away; it gets transferred to others,” wrote Education Secretary Linda McMahon. This perspective, while fiscally prudent, may overlook the complex realities facing borrowers who lack the means to repay. The tools available for borrowers to rehabilitate their loans, though helpful, are often out of reach for those already living paycheck to paycheck.

In the broader context, this development may serve as a catalyst for renewed debate over the fairness and sustainability of the federal student-loan system. Without additional reforms, the cycle of default and garnishment is likely to persist, with lasting social and economic costs. Policymakers, businesses, and advocacy groups alike will need to consider not just financial accountability, but also the human impact of these policies on America’s aging and indebted population.