Student loan borrowers across the United States are preparing for what could be one of the most challenging financial periods they have faced as the final extension of government-mandated pauses for payments on student loans is set to expire. According to data from the Department of Education, over 43 million Americans currently hold student loans, with 7.5 million borrowers already falling behind—defaulting on payments could seriously hinder their prospects of securing additional credit, like mortgages, for future endeavors such as buying homes.
“If you’re in the market for purchasing a house and have defaulted on your student loans, the process of such a major purchase just got substantially more difficult,” said Alex Beene, financial literacy instructor at the University of Tennessee at Martin. Defaulting sends negative signals to future lenders, making it less likely for borrowers to be approved for future loans.
The government initially paused collections for all student loans in March 2020, as the pandemic led to nationwide economic disruption. This pause included halted accrual of interest. After four long years, the Biden Administration’s final extension of forgiveness is set to end this month, stirring anxiety among many borrowers. Kevin Thompson, finance expert and founder/CEO of 9i Capital Group, remarked, “Many borrowers anticipated their student loans would be forgiven or eventually reach a point where they no longer had to make payments. With the resumption of repayments, many find themselves unprepared. This sudden financial obligation could be particularly detrimental for those who had incorporated non-payment with their budgeting, making it harder to save for homes or qualify for other types of credit.”
A fresh perspective from the other end of the equation emerges as we look at the 5.6 million current borrowers who are already subject to collections due to falling behind on payments. The Department of Education has reported this number of students whose payments are over 270 days overdue. Policy advocates warn not only about the impact of these collections but about the potential shock many borrowers may face. “Some defaulted borrowers may think things have cleared up, or they’ve hit a statute of limitations, or don’t really know why their loans haven’t been collected over the last four years,” explained Tia Caldwell, senior higher education policy analyst at New America. “The worry is ... people think their debt is cleared up and they're going to be in for a rude awakening.”
The White House has stated the intention to resume collections only after 2025, but does not yet have official dates set. This task will likely devolve upon future administration members, as the incoming President-elect Donald Trump and his nominee to lead the Department of Education, former WWE CEO, Linda McMahon, could navigate this difficult transition. “It seems likely... McMahon will inherit a student loan system where she will have to turn wage garnishment back on,” said Mike Pierce, executive director of the Student Borrower Protection Center.
The high prevalence of student loan defaults has long drawn the ire of policymakers—the U.S. saw about 10% of debtors fall behind on their loans within three years of initiating repayment. Individuals often face steep penalties for their defaults, with little chance of relief through bankruptcy, as the government can leverage legal measures like wage garnishments to recoup funds.
For many struggling borrowers, relief via income-driven repayment programs exists; some qualify to have their payments decreased dramatically. A recent survey by the Consumer Financial Protection Bureau found troubling results—31% of borrowers who used traditional repayment plans were unaware they could switch to alternatives, underscoring endemic misinformation surrounding student loans.
The Biden administration attempted to mitigate future defaults through its Fresh Start initiative, which allowed defaulted borrowers to return to repayment without penalties; yet only 900,000 used it before it ended this October. “Far and away, I’d say the biggest issue is borrowers just didn’t know about it,” said Abby Shafroth, co-director of advocacy at the National Consumer Law Center. This confusion surrounding student loans has been exacerbated by litigation challenges surrounding Biden’s student loan forgiveness efforts and the generous income-driven repayment program, known as SAVE, inadvertently leaving many borrowers lost.
It’s clear: the potential resumption of collections is looming with serious consequences, especially for individuals least prepared—those most disadvantaged financially already facing substantial hurdles. Shanna Tallarico, the consumer protection project director at the New York Legal Assistance Group, describes this chaotic climate, stating, “The people who remain in default after the fresh start program...are often the borrowers who are hardest to reach.”
Given the political climate and uncertainty surrounding potential shifts to current policies, experts are concerned about how new administration directives would impact the already beleaguered student loan system. Brian Denton from the Pew Charitable Trusts has said, “We’ll certainly be watching...who’s contacting borrowers, what message they’re being told, and how it impacts them.”
Consumer advocacy groups are beginning outreach efforts targeted at borrowers, aiming to provide the necessary information and assistance before the anticipated collections begin. The road to recovery from student loan debt has recently grown not only more complicated but more urgent as many borrowers must adapt to the impending reality of repayment obligations.