U.S. Resumes Collections on Defaulted Student Loans, Sparking Economic Concerns

On May 5, 2025, the U.S. Department of Education resumed collections on defaulted federal student loans, ending a five-year pause initiated during the COVID-19 pandemic. This policy shift affects approximately 5.3 million borrowers currently in default, who now face potential wage garnishment, tax refund seizures, and reductions in Social Security benefits.

The reinstatement of aggressive collection measures has led to a significant surge in student loan delinquencies. In the first quarter of 2025, the delinquency rate for student loans rose sharply to 8%, up from 0.8% in the previous quarter, marking the highest rate in five years. This surge is particularly pronounced among older borrowers, with approximately 452,000 Americans aged 62 and older facing garnishment of their Social Security benefits.

The broader economic implications are concerning. The New York Federal Reserve reports that over 10% of student loan balances are now past due or in default, potentially harming borrowers' creditworthiness and limiting access to future borrowing. Economists warn that these factors, combined with existing economic challenges such as high inflation and job insecurity, may significantly dampen U.S. economic growth.

In response, the Department of Education is encouraging borrowers to proactively address their loan statuses. Options include setting up new repayment plans or rehabilitating defaulted loans to bring them out of default. However, critics argue that the resumption of aggressive collection tactics may push vulnerable borrowers deeper into financial hardship, highlighting the need for comprehensive policy solutions to address the student debt crisis.

The resumption of collections marks the end of a five-year pause initiated during the COVID-19 pandemic. This pause was implemented to provide relief to borrowers during a period of economic uncertainty. The current policy shift reintroduces collection practices that were standard prior to the pandemic, but now in a context of ongoing economic challenges.

The resumption of federal student loan collections has significant implications for millions of borrowers, particularly older Americans and those already facing financial hardship. While the Department of Education emphasizes the necessity of repayment, the broader economic and social consequences highlight the need for comprehensive policy solutions to address the ongoing student debt crisis.