Collecting default student loans to resume May 5th: What do you know?
Since the pandemic, federal student loan borrowers have mostly been protected from the toughest results of default. It is about to change to May 5th.
After roughly five years of off, student loan borrowers are watching their credit scores poke once more if they are late in paying. Economists say it may be bad news for borrowers and the economy as a whole.
A recent report from the Federal Reserve Bank of New York found that student loan delinquency rates skyrocketed from under 1% in the fourth quarter of 2024 to nearly 8% in the first quarter of this year. This will send some credit scores to the freefall, making it even more difficult for borrowers to secure affordable loans or withdraw major purchases.
The Federal Reserve Bank of New York said credit scores for more than 2.2 million new arrears student loan borrowers had plummeted over 100 points. There were scores of over 1 million, with scores dropping at least 150 points.
“We were able to see millions of borrowers potentially locked out of the traditional mortgage market. They were able to double the cost of car loans. Finding rental homes has become more difficult,” said Aissa Canchola Banes, policy director for the Student Borrower Protection Centre, an advocacy group focusing on student loan debt. “Not only the immediate harm, but also the long term harm is massive.”
Why is student loan delinquency on increasing?
The federal government’s pandemic-era student loan payment suspension was lifted in September 2023, but payments at least 90 days in advance could be reported to the Credit Bureau until fall of 2024. These delinquents began appearing in credit reports in 2025.
According to the Federal Reserve Bank of New York, as of the first quarter, one in four student loan borrowers needed to make payments were behind on the loan.
Much of that surge could be driven by disruptions over rebooting loan payments, according to Beth Akers, a senior fellow focusing on the economics of higher education at the conservative think tank, the American Enterprise Institute.
The suspension that began under President Donald Trump’s first administration has been extended multiple times under former President Joe Biden. Meanwhile, online rumors claimed that all student loans were cancelled forever under Biden. Biden tried to allow $400 billion worth of student debt, but the plan was eventually rescinded by the Supreme Court.
“I think for a long time, borrowers thought their loans had been cancelled, or they wouldn’t have to pay them back, and I don’t blame anyone who believes that,” Akers said. “We were really confused from the borrowers.”
Other borrowers may not be financially prepared to pay off their loans, especially after they drop out of their habits on monthly payments.
“The economy is very different from before Covid,” said Betsy Mayott, president of the Student Loan Advisor Institute, a nonprofit based in Plymouth, Massachusetts. “Things like housing, eggs and lettuce are much more expensive than they did before Covid. So payments that could have been affordable in 2020 may not be affordable now.”
A paper co-authored by Michael Dinerstein, an associate professor of economics at Duke University, North Carolina, found that student loan suspensions allow borrowers to undertake other forms of debt, including mortgages, credit card loans, and car loans. Now these borrowers are also on hook for student loan payments that can cost hundreds, if not thousands, of each month.
Another possible factor? This year’s surge could be linked to an influx of late payments that have been spread out for years without a pause, according to Christine Bragg, a leading research associate in the work, education and labor sector at the Urban Institute, a Washington, DC-based think tank.
“About one million people enter the default per average year,” Blagg said. “And what we had is that nearly five years of students have not reached that default period. So we can think of this as a nearly accumulation of people who would have been defaulting at that point at this point.”
In the first quarter of 2025, approximately 5.6 million borrowers were considered new delinquent. The Federal Reserve Bank of New York in March estimated that more than 9 million student loan borrowers would have significantly reduced credit scores by the end of June.
What does this mean for borrowers?
Leece Wallace, 34, of Oakland, California, saw her credit scores plummet from over 700 people this year after halting student loan payments.
Wallace, a graduate of California College of the Arts, left school in 2023 with student debt worth around $50,000. Monthly payments were nearly $500 a month, but Wallace said it was not acceptable for wages for Bay Area studio artists.
Wallace said last year he stopped paying his loan to spend money on his graduate school application after being hit with the impression that his loan would be automatically postponed. He realized that it was not true when his application for student housing at the University of Nevada’s University of Las Vegas was rejected due to his low credit score.
The credit score threw a wrench at Wallace’s plan to move to graduate school. He has to get a Cosiner for his home and is worried that he can afford a car after years of travelling on public transport in California.
“What vehicle can I get with a credit score of 488?” he asked. “To be honest, it’s going to be really difficult.”
Akers believes it’s fair to taxpayers to resume student loan payments, but said there’s a “severe trickle-down impact” when credit scores hit, especially as baseline interest rates are already high.
“People can quickly think about their ability to fund the purchase of new homes at affordable interest rates,” she said. “But employers also sometimes look at your credit score. When you rent a house, they look at your credit score.”
Borrowers can find themselves in more hot water as they continue to miss payments. After 270 days, the government can seize wages, tax returns, or Social Security benefits. The Federal Office of Student Aid will send a notification about wage decorations this summer.
What does this mean for the economy?
Economists warn of rebooted payments and sinking credit scores could bring another hit to the economy, which already shows signs of slowing this year.
“It’s another potential drag,” Bragg said. “We don’t have a good sense of how big it is compared to everything else that’s going on at the moment, but whenever there is dollars spent on loans it’s dollars that aren’t being put into the economy or saved for big purchases.”
Morgan Stanley Economists estimates that increased loan payments could potentially reduce by up to 0.15% points as payments increase this year by up to 0.15% points. A report from May 5 said that GDP is “relatively small,” but describes this as “another headwind” for consumers.
Tips for borrowers
Canchola Bañez, a student borrower protection center, shared advice to borrowers who are in arrears on their loans.
- Borrowers should consider repayment options at dustentaid.gov. Canchola Bañez said an income-driven repayment plan is likely the best option. This shift may take some time. According to education department figures, there is a backlog of around 2 million federal student loan borrowers demanding income-driven repayment plans. The borrower may be tolerant while the application is being processed. This means you don’t have to pay your loan while waiting for approval on a more affordable payment plan.
If the borrower is more than 270 days behind on the loan, the education department will lay out three options to get out of default.
- Pay off the loan completely (not practical for most borrowers).
- Loan Rehabilitation: Borrowers can make nine affordable monthly payments within 20 days of the set date by contacting the loan owner and agreeing to the written consent.
- Loan integration: The borrower agrees to repay a new “direct integration loan” under an income-driven repayment plan or make three full, consecutive, voluntary monthly payments on the default loan before consolidation. This option is faster, but the unpaid interest is added to the principal balance, allowing borrowers to pay more overall.
