The Trump administration restarted collections on defaulted federal student loans on May 5, 2025, ending a five-year pause that began in March 2020 during the COVID-19 pandemic. This affects over 5 million borrowers in default, with another 4 million in late-stage delinquency (91-180 days late), potentially leading to nearly 10 million in default soon.
The U.S. Department of Education, led by Secretary Linda McMahon, is using the Treasury Offset Program to withhold tax refunds, federal salaries, and Social Security benefits, with wage garnishment set to begin this summer after a 30-day notice. The move aims to protect taxpayers from bearing the cost of unpaid loans, as 42.7 million borrowers owe over $1.6 trillion, but only 38% are current on payments.
Borrowers face risks like credit score damage, with subprime borrowers potentially losing 87-129 points, and financial strain from garnished wages or benefits. Critics, like the Student Borrower Protection Center, call this “cruel” amid economic uncertainty, especially as the Education Department faces staff cuts and a potential shift of the loan portfolio to the Small Business Administration.
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Over 5 million borrowers in default, plus 4 million in late-stage delinquency, face immediate financial pressure. Wage garnishment (up to 15% of disposable income), tax refund offsets, and Social Security benefit reductions will hit low- and middle-income households hardest, reducing disposable income for essentials like housing and healthcare. Defaulted loans already lower credit scores, but aggressive collections could worsen this, with subprime borrowers losing 87-129 points.
This limits access to mortgages, auto loans, and jobs requiring credit checks, perpetuating economic hardship. Loan rehabilitation or income-driven repayment plans are available, but staffing cuts at the Education Department and potential loan portfolio transfers to the Small Business Administration may cause delays, leaving borrowers stuck in default. Older borrowers reliant on Social Security, single parents, and minority groups with higher default rates (e.g., Black borrowers at 17% default rate vs. 9% for white borrowers) face heightened vulnerability.
Garnished wages and withheld refunds will curb spending, potentially slowing economic growth. With $1.6 trillion in total student debt, a significant portion of the 42.7 million borrowers cutting back could dampen retail, housing, and service sectors. Financial stress and credit damage may force borrowers into lower-paying jobs or discourage workforce participation, especially for those facing job loss from concurrent tariffs or economic shifts.
Wealthier borrowers who avoided default continue building assets, while lower-income defaulters face deeper financial traps, exacerbating wealth gaps. The administration frames collections as protecting taxpayers from footing the bill for unpaid loans (only 38% of borrowers are current). However, critics argue this prioritizes fiscal austerity over borrower welfare, especially without broader debt forgiveness, which Trump has rejected.
Staffing reductions and a potential shift of the loan portfolio to the Small Business Administration could disrupt loan servicing, risking mismanagement or delays in borrower support programs. The “cruel” label from advocacy groups like the Student Borrower Protection Center may fuel opposition, especially among younger voters and progressives. This could complicate Republican messaging in future elections, particularly if economic conditions worsen.
Aggressive collections may deter future borrowing or college enrollment, especially among low-income students, potentially reducing higher education access and long-term workforce skills. With 4 million borrowers nearing default, collections could push total defaults higher, straining the federal loan system and increasing taxpayer exposure if defaults become unmanageable.
Borrowers may pursue lawsuits or administrative appeals, clogging courts and agencies, especially if servicing errors occur during the transition. Borrowers can mitigate impacts by contacting the Default Resolution Group for rehabilitation or repayment plans, but systemic bottlenecks and economic pressures may limit success. The policy reflects a shift toward fiscal accountability but risks deepening economic inequality and borrower distress without complementary relief measures.