Student Loan Update: Millions of Borrowers to See Debt Change This Month
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Millions of student loan holders may see their paychecks garnished to recover their defaulted debts this month.
According to a report by credit bureau TransUnion, some 1 million borrowers will enter default this month—meaning they will become subject to federal collections, as well as dented credit scores and other unwanted elements.
Why It Matters
Student loan collections were largely paused beginning in March 2020 due to the COVID-19 pandemic, under the Joe Biden administration. But this has changed under President Donald Trump.
The process of resuming collections began in May, as the Department of Education warned that borrowers who fell behind and failed to take action could face wage garnishment and significant damage to their credit scores.
What To Know
Approximately 270 days after a borrower first becomes 90 or more days past due on a loan, they are classified as in default and become subject to collection efforts by the Department of Education. At that point, loan holders are at risk of having 15 percent of their pay docked to help pay off the debt.
Of the 5.8 million borrowers who recently became delinquent (usually having missed one quarterly payment), an estimated one-third—about 1.8 million—were expected to enter default in July 2025, according to TransUnion. Another 1 million are projected to default in August, followed by an additional 2 million in September.
The impact on borrowers goes beyond just collections. The report indicates that those falling behind on payments have experienced an average drop of 60 points in their credit scores.
Stock image of a mortarboard laid over U.S. Dollars.
Stock image of a mortarboard laid over U.S. Dollars.
GETTY
Over 20 percent of borrowers who are now at least 90 days delinquent were previously classified in "prime" or "super prime" credit categories. However, after missing payments, fewer than 2 percent remain in these top credit tiers, with many slipping down by at least one entire risk level.
"Late payments can hurt your credit score, and if you are actually in default, it can stay on your credit report for up to seven years," Bobbi Rebell, financial planner and personal finance expert at BadCredit.org, told Newsweek—something that can have far-reaching consequences.
"Keep in mind that employers sometimes check your credit, not to mention mortgage lenders if you hope to purchase a home," she said. "Perhaps the biggest incentive to stay on track is that if you aren't paying on time, you could lose access to things that are helping you to get rid of the debt like income-driven payment plans, as well as deferment and forbearance options. Finally, without a track record of paying on time, if you want to continue your education, it will likely be challenging to get another student loan in the future."
What People Are Saying
Michele Raneri, vice president and head of U.S. research and consulting at TransUnion: "We continue to see more and more federal student loan borrowers being reported as the 90+ days delinquent, making a larger number of consumers vulnerable to entering default and the start of collections activities."
Secretary of Education Linda McMahon said in a statement on May 5: "As we begin to help defaulted borrowers back into repayment, we must also fix a broken higher education finance system that has put upward pressure on tuition rates without ensuring that colleges and universities are delivering a high-value degree to students.
"For too long, insufficient transparency and accountability structures have allowed U.S. universities to saddle students with enormous debt loads without paying enough attention to whether their own graduates are truly prepared to succeed in the labor market."
What Happens Next
The Department of Education is sending notices to borrowers who have fallen behind on their loans payments.
Meanwhile, more than 7 million federal student loan borrowers are seeing their balances increase as of August as interest charges resumed for participants in the Saving on a Valuable Education plan.
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