Collection of delinquent student loans resumes
Collections on defaulted federal student loans will begin Monday.
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Before the new year, millions of Americans may want to contact their student loan servicers because they may be on a soon-to-be-reported default list, experts say.
Technically, more than 4 million Americans are behind on their student loans, or at least 270 days past due, said Michele Ranelli, vice president and head of U.S. research and consulting at TransUnion. It just hasn’t been reported to the credit bureaus yet for a variety of reasons, including processing delays, she said. When finally reported, about 10 million borrowers, representing about 25% of the federal student loan portfolio, could default on their loans, the Education Department said. Experts say this is a record.
If borrowers don’t act quickly to avoid being reported to the credit bureaus, their credit scores can plummet and their wages, Social Security benefits, and tax refunds can be garnished.
“Borrowers have remained delinquent since payments resumed after the pandemic, but these delinquencies will not fully show up on federal reports until 2026,” said Kady Ambus, a consumer finance expert at Earnest, a platform that connects students with private loans, refinances and scholarships. “The tension is already here. What looks like a cliff in 2026 is actually a delay in reporting.”
More and more borrowers are deferring payments
The first day a payment is past due or delinquent, it remains so until the past due amount is paid or other arrangements are made, such as a change in repayment plan or deferment or forbearance.
If your payment is more than 90 days late, the delinquency will be reported to the national credit bureaus and could negatively impact your credit rating. Credit scoring agency FICO said in May that Americans’ average scores were down 2 points from a year ago, as delinquencies of 90 days or more and serious delinquencies exceeded pre-pandemic levels for the first time.
The serious delinquency rate reached a record high of 30.6% in March, Ranelli said. It has since fallen to 28.5%, but is still rising.
The rate of serious delinquency rose to 14.3% from July to September, the Fed said, compared to 12.9% in the previous three months, 8% in the first three months of this year and 0.8% by the end of 2024.
“This is the fastest rate of transition to serious delinquency since data was collected back in 2000,” said Matthew Nessler, senior economist at KPMG. “This means more borrowers will remain in the early stages of delinquency without making payments.”
What happens if the borrower cannot pay?
Ranelli said Americans who report their loans are more than 90 days behind have already seen their credit scores drop by an average of 60 points.
A drop in your credit score has lasting effects. Lenders use these to decide whether to approve a loan or credit card, and to determine interest rates and credit limits.
“The thing that people are most upset about is when they want to get a house,” Ranelli said. “They saved money, did their research, and ultimately found a home within their budget. But when they try to get a mortgage, they find out their score is too low. It’s something that takes time to recover, so it’s a missed opportunity.”
In the meantime, borrowers will face high collection fees, wage garnishments, and even Social Security garnishments and tax refunds, hitting very low-income households the hardest. “These foreclosures exacerbate economic hardship for those who can’t afford it,” the nonprofit Institute for College Access and Success warned in a report.
“The pain is not evenly distributed,” Ambus says. “Older borrowers, those on fixed incomes, and those without a degree face the highest repayment stress.”
Borrowers who are behind on their student loans will be flagged on the government’s credit reporting system, making them ineligible for new federal student aid and unable to qualify for federally assisted home loans.
What should the borrower do?
If you’re on the brink of serious delinquency, “the biggest mistake you can make is waiting too long,” Ambus says. “If you think you’re going to miss a payment, call us right away. Late payments give you more options, but being late gives you more options.”
Experts said borrowers should consider other payment plans that may be more compatible with their cash flow.
“Consolidation could also be a prudent move for borrowers seeking Public Service Loan Forgiveness (PSLF) or those looking to lock in access to their current income-driven plans before the new rules go into effect,” Ambas said. “For borrowers with strong credit, refinancing can lower monthly payments and interest costs. It’s not suitable for everyone, but it can provide short-term respite while stabilizing people’s finances.”
Experts say borrowers, especially those on the brink of default, need help and should call a debt collector immediately.
“If you’re late, it’s going to be unpleasant to make that first call,” Ranelli said. “But you have to do it yourself and start talking to someone to find a way to work it out with your servicer. Don’t just let that happen and let your credit score drop.”
If you haven’t yet been reported in default, “consider this a grace period to contact your servicer and resolve the issue,” Ranelli said. “Get funding to improve your situation and protect yourself from taking a hit to your credit score.”
Instead of splurging on holiday gifts this year, you might consider asking friends and family to help pay off your student loans, she says.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday to Friday morning.
