Millions of student loan borrowers may get a wake-up call Monday, when the Department of Education resumes loan collection. The restart of collections comes as a recent analysis shows that delinquency rates among people with student debt are at an all-time high.
After nearly five years since the U.S. government temporarily halted federal student loan payments and interest accrual during the COVID-19 pandemic, the Education Department’s Office of Federal Student Aid (FSA) resumed collections on defaulted federal student loans on May 5.
Referrals for collection have been on hold since March 2020 due to the pandemic.
“The level of concern varies depending on why a borrower has not paid their federal student loans. “If they do not have the capacity, they may be overstretched,” said Michele Raneri, TransUnion’s vice president and head of research.
“They may not know they have to pay them, may not be able to find the information on how to do so, or may not have a willingness to pay for one reason or another,” she told me.
According to a new analysis by TransUnion, one of the three major credit bureaus, one in every five borrowers is “seriously delinquent” or has a payment that is 90 days or more past due. The study examines the percentage of student loan borrowers at risk of default and the impact this has on their credit scores.
Those in default face an uphill battle: failing to make a payment allows the government to withhold portions of Social Security benefits and tax refunds, as well as garnish wages. Defaulting on a loan can also damage your credit score, making it more difficult to obtain another loan in the future.
Read on to learn more about the current state of student loan borrowing as default collections resume.
Millions at risk of defaulting
The credit bureau’s findings highlight how student loan repayments have struggled to get back on track since COVID-19. Student loan payments were paused in March 2020 and did not resume until October 2023.
For borrowers across the United States who had not had to worry about making payments in years, the resumption of student loan payments posed a challenge for many struggling financially.
According to TransUnion, approximately 20% of the 19.6 million student loan borrowers are at risk of default. The figure — which TransUnion believes could be much higher — exceeds the credit bureau’s previous all-time high of 15.4% in 2012.
TransUnion focused its analysis on those who were likely to be 90 days past due on their loans. That reduced the number of borrowers from approximately 42 million to 19.6 million. This report excluded people in deferment or forbearance, as well as private student loan borrowers.
According to the federal student aid website, loan servicers can report borrowers who are 90 days or more behind on their loans to national credit bureaus.
People who went into default lost an average of 63 points, according to TransUnion, though those with higher credit scores were at risk of losing even more. Those in “super prime” credit territory, defined by a TransUnion spokesperson as having a credit score of 781 or higher, saw their average credit score drop by 175 points as a result of impending student loan defaults.
“Borrowers can review their credit report to see what loan servicers are reporting,” Raneri explained to CBS MoneyWatch. “This can also help people find who to contact if they have a loan they did not expect to see.”
To reduce student loan defaults, Pew Charitable Trusts recommends prioritizing income-driven repayment (IDR) plans, which calculate monthly payments based on a person’s income and family size, as well as better outreach to borrowers and automation.
“Data-sharing could also be used to automatically enroll borrowers into an IDR plan if they fall severely behind on payments, a move that could significantly curb future defaults by connecting borrowers with affordable payments,” wrote Regan Fitzgerald, senior manager; Brian Denten, officer; and Ilan Levine, senior associate at Pew’s Student Loan Initiative.
According to the Education Department, the nation’s nearly 43 million student loan borrowers owe a total of $1.6 trillion. According to agency data, over 5 million of these borrowers have not made a monthly payment in over 360 days, and only 38% are keeping up with their repayment plans.
Secretary of Education: Long overdue
Student loan collections were disrupted by the COVID-19 pandemic. In March 2020, during President Trump’s first term, the Education Department suspended student loan payments and reduced interest rates to zero to give borrowers some breathing room.
When former President Biden took office in 2021, he extended the loan repayment deadline several times before Congress passed legislation requiring payments to resume in October 2023. During his presidency, the Biden administration attempted to provide student loan debt relief several times, but his efforts were thwarted by courts.
While student loan repayments resumed over a year and a half ago, Monday, May 5, marks the first day since March 2020 that the Department of Education has collected repayments from borrowers who have struggled to meet payment deadlines. Linda McMahon, the U.S. Secretary of Education, believes the return is long overdue.
“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” McMahon declared in an April statement. “The Biden Administration misled borrowers: the executive branch lacks the constitutional authority to eliminate debt, and loan balances do not simply disappear. “Hundreds of billions have already been transferred to taxpayers.”