Federal student loan collections resume amid rising delinquencies

[UNITED STATES] The Trump administration’s reinstatement of collection efforts on defaulted federal student loans is having significant implications for borrowers in delinquency.

Those in default now face the potential for wage garnishment, as well as seizure of tax refunds and Social Security benefits.

However, the renewed push for collections may have broader financial repercussions. According to a recent report by the Federal Reserve Bank of New York, involuntary collections could trigger a “spillover effect” — increasing the likelihood that affected consumers may fall behind on other financial obligations.

The restart comes as many American households continue to grapple with ongoing financial pressures. While inflation has eased somewhat, it remains above pre-pandemic levels, and surging housing costs have tightened budgets. For borrowers already struggling with credit card and auto loan payments, the added burden of student loan collections could deepen financial instability — particularly among low-income families.

Disposable Income Hit as Collections Resume

“We were obviously somewhat concerned about potential spillovers to delinquencies on other types of debt,” researchers at the New York Fed said during a press briefing earlier this month.

“During the payment pause, borrowers may have used those funds to stay current on credit cards and auto loans,” they noted. “Now that student loan payments have resumed, those same borrowers may face renewed financial pressure.”

Research from JPMorgan estimates that monthly collections on defaulted loans could slash consumers' disposable income by between $3.1 billion and $8.5 billion.

Young borrowers are among those most affected. According to a 2024 Consumer Financial Protection Bureau survey, nearly 40% of borrowers under age 35 reported difficulty affording basic necessities since payments restarted. This group often holds larger debt balances relative to income and is more likely to rely on credit cards during emergencies, heightening the risk of compounding debt issues.

“Some people are adding to credit card debt because of resumed student loan payments — that’s the spillover effect,” said Ted Rossman, senior industry analyst at Bankrate. “Something’s got to give.”

Money That Can’t Go to Other Financial Things

Until recently, federal collections on defaulted loans had been paused since March 2020. After the COVID-era freeze on payments ended in September 2023, the Biden administration granted a one-year grace period shielding borrowers from penalties for missed payments. That on-ramp expired on September 30, 2024, and as of May 5, the Department of Education has resumed collections.

The move has reignited broader debates over student debt. Critics argue that the government’s collection efforts disproportionately harm vulnerable borrowers, while supporters say repayment enforcement is essential to managing the $1.6 trillion federal student loan portfolio. Meanwhile, proposals for expanded relief programs have stalled amid congressional gridlock.

Whether through garnishment or voluntary repayment, the financial impact on borrowers is likely to be substantial. “It’s just money that can’t go to other financial things,” said Matt Schulz, chief credit analyst at LendingTree.

Following the end of the five-year pause, student loan delinquencies have surged. The New York Fed reported that in the first quarter of 2025, nearly 8% of student debt was at least 90 days past due — a sharp rise from under 1% the previous quarter.

Federal data shows that around 42 million Americans hold student loans, with 5.3 million in default and another 4 million more than 90 days behind on payments.

The growing number of delinquencies is raising alarms about long-term credit damage. Defaults can stay on credit reports for up to seven years, potentially blocking access to mortgages, car loans, and even jobs. While loan rehabilitation programs offer a way to remove defaults from credit histories, many borrowers are unaware of these options or struggle to navigate the system.

Among those currently required to repay their loans — excluding individuals in deferment, forbearance, or still in school — nearly one in four are now behind on payments, according to the New York Fed.

As more borrowers exit forbearance and re-enter repayment, further increases in delinquencies and defaults are expected, according to a recent Bank of America research note. “This transition will likely drive delinquencies and defaults on student loans higher and could have further knock-on effects for consumer finance companies,” analyst Mihir Bhatia wrote on May 15.

In a blog post, New York Fed researchers said it's still unclear how much these penalties will spill over into other areas of consumer credit, but they pledged to “continue monitoring this space in the coming months.”