Millions of People Aren't Paying Their Student Loans. That's Everyone's Problem - Your Money Briefing

Wall Street Journal

a day ago

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Callum Borchers: Here's Your Money Briefing for Friday, May 30th. I'm Callum Borchers for the Wall Street Journal. The student loan bill is due or past due, like way past due for millions of Americans who are now officially delinquent. Bummer for them, but does it matter for everyone else?
Justin Lahart: Every penny that you have to pay to pay down your debt is a penny that you're not spending on something else. So that will weigh on the economy.
Callum Borchers: We'll look at the ripple effect if a whole lot of people don't pay back their college debts. Wall Street Journal economics reporter, Justin Lahart, joins us after the break. Millions of Americans who borrowed money from the federal government to go to college are facing a harsh reality. Uncle Sam wants his money back and he's willing to use tough tactics to get it. Wall Street Journal economics reporter, Justin Lahart, has been digging into what this means for debtors and the rest of us. Justin's student loan payments restarted in late 2023 after a break during the pandemic. How many people aren't paying up and what kind of financial trouble are they in?
Justin Lahart: There was an on ramp after 2023, took about a year where you didn't have to pay. But then starting in the fall of 2024, people were required to pay up. And what we saw is that in the first quarter there was a big jump in the number of people who were delinquent, who were behind 90 days or more on their loan. It hopped up from 1% to 8% according to the Federal Reserve Bank of New York. So there really are a lot of people who simply aren't paying.
Callum Borchers: And what does that mean for their finances? I mean, is it digging their credit scores? Is it going to make it harder for them to borrow money? How might this make them feel some pain in the personal budget?
Justin Lahart: It is digging their credit score. The New York Fed found that there was a big drop in credit scores. A lot of these people are already subprime credit, so they already have a hard time getting your credit card, mortgage, a car loan. But a lot of folks had good credit quality and getting dinged on this makes it so they're not going to be able to get those things like they might've just three or four months ago.
Callum Borchers: You mentioned the on ramp earlier. The federal government didn't report these people to credit bureaus right away, now they are. How well is the federal government escalating its debt collection effort?
Justin Lahart: The education department has said that for people who aren't paying that eventually they're going to garnish their wages, garnish taxes. The effects of that on the economy might take a while to show up, but the way this typically happens is that people have their tax returns garnished. Everyone's already filed their taxes, gotten their tax returns so that might be more of a 2026 event for the economy. There's also a separate issue that two really big servicers, Navient and the Pennsylvania Higher Education Assistance Authority, better known as Fed alone, they ended their contracts with the federal government to service loans. So you could imagine if you were someone who had been paying through Navient in 2019, right now you're getting a letter saying, "You owe money," but it's from some company that you've never heard of. You might think, "Man, that's a scam." The sad thing about that is someone, they may have been well-intentioned, they may have wanted to pay their debt or would've paid their debt. They're confused and they may have gotten their credit score dinged. Maybe now they're paying, but still that is a headwind for their finances and ultimately headwind for the economy.
Callum Borchers: So clearly a lot of people are feeling squeezed. They're getting these scary looking letters in the mail. Their credit scores may be going down. You said they may think they're getting a tax return, but oops, Uncle Sam is actually keeping it as it turns out. But how does that translate to the broader economy? How might this show up for those of us who are not among the people falling behind on student loans?
Justin Lahart: Every penny that you have to pay to pay down your debt is a penny that you're not spending on something else. So that will weigh on the economy. Morgan Stanley economists estimate that it will knock about one-tenth of a percentage point out of GDP. It could be more than that. The bigger concern right there is that it's not a huge drag on the economy, but it is a drag on the economy and this is an economy that is facing other issues, primarily tariffs, but also reductions in government spending, immigration restrictions and so on and so forth. So it just adds to the things that are pushing against the economy and could make for slower growth this year and next.
Callum Borchers: Oh, interesting. So tell us a little bit more then about the profile of somebody who's falling behind on college debt payments. Who are these folks?
Justin Lahart: Two things that are very predictive of whether someone fell behind. The first thing is if they did not finish their degree. So if you finished your degree, then you're able to get that job that pays better. It makes it easier to pay off your loan. Another thing is if people went to a for-profit college, so a lot of people got stung by these for-profit colleges, there's a lot of overlap between the two. The profile is really of people who are poor. It's not rich coastal elites who went to Brown who are falling behind. A lot of people think, "Oh my God, these folks are eating avocado toast instead of paying off their loans." But that's really not the picture that you see when you look at who these folks are.
Callum Borchers: Well, given that description then Justin, and can we expect that most people who were delinquent to start paying up, now they see the is really serious, or are many going to continue to lag behind because they truly can't pay these debts?
Justin Lahart: A little bit of both. If you are paying off your debt right, that puts severe constraints on you. There are some income-based loan payment plans, more of those might be helpful. It also might be helpful just for a little bit more guidance for these folks just to know the consequences of falling behind, especially for younger people, people who haven't had any experience paying off their debt.
Callum Borchers: When the payments restarted. Justin, I talked to people who had already repaid their college debts, and I got to say many of them were happy to see the collections resume because they thought it was only fair that other people have to pay back their loans too. Is fair best for the economy?
Justin Lahart: Yeah, that's a good question. In the long run, will the economy be better off if everyone repays their debt and gets through it? Yeah, maybe. But I've gotten a lot of email from people talking about how it's very important that people pay their debts, and fine. But the issue right now is that this is creating a headwind for the economy. It might be a headwind that you're willing to accept that you think is right, that you think is proper, but to think that it won't be some kind of at least temporary headwind for the economy just seems a little wrong.
Callum Borchers: That's WSJ a reporter, Justin Lahart, and that's it for Your Money Briefing. Tomorrow we'll have our weekly markets, What's News in markets, and then we'll be back on Sunday with a bonus episode of YMB. We're calling it Keeping It Money where we'll take a deep dive on ways that you can make some extra cash. This episode was produced by Ariana Aspuru. I'm your host, Callum Borchers. Additional support this week from Zoe Kuhlkin, Jessica Fenton, and Michael LaValle wrote our theme music. Our supervising producer is Melony Roy. Aisha Al-Muslim is our development producer. Scott Saloway and Chris Zinsli are our deputy editors. And Philana Patterson is the Wall Street Journal's head of News Audio. Thanks for listening.