On May 5, the U.S. government will start collecting on defaulted student loans from about 5 million Americans, according to the Department of Education. Another 4 million people are in late-stage delinquency and may also face collections in the coming months. This marks the end of a payment pause that began in 2020 due to the COVID-19 pandemic. These borrowers will soon see money taken from their wages. The government will collect payments through wage garnishment and from benefits like Social Security. Experts say this will reduce household spending and could weaken the overall economy.
Experts Warn That This Policy Could Slow the Economy Down
Many economists worry that restarting collections on student loans will add financial pressure at the worst possible time. Consumer spending drives around 70% of the U.S. economy. Less money in borrowersโ pockets means less shopping, fewer car purchases, and even fewer home sales. This could hurt businesses and slow growth.
โThe bottom line is: itโs not going to be good for the economy, given the current economic situation thatโs already precarious,โ said Scott Imberman, a professor of education policy at Michigan State University. โItโs an additional weight that youโre putting on until we tip into a potential recession.โ
Although the student loan collections alone may not cause a recession, they could add to other risks like high inflation, rising interest rates, and market uncertainty. Economists say these combined effects could tip the economy in the wrong direction.
Reduced Spending Could Hurt Local Businesses and Jobs
When borrowers begin repaying, every dollar they send to the Treasury is a dollar not spent elsewhere. Thatโs money not going to restaurants, stores, or small businesses. As a result, the economy may feel the pressure at the local level.
โEvery dollar that goes to pay the loans is a dollar that wonโt be circulated into the economy,โ said Michael Jones, an economist at the University of Cincinnati.
This drop in spending may not seem big at first. But when millions of people cut back at the same time, the impact becomes serious. Local economies, especially in areas with high student debt, could take the biggest hit. People may also postpone big-ticket purchases, leading to less demand for cars and homes.
Borrowers May See Lower Credit Scores and Less Access to Loans
Experts also warn that the return of collections could damage many credit scores. Once a loan goes into collections, credit agencies are notified. Borrowers may then find it harder to qualify for future loans. This can delay major life purchases and hurt credit histories long-term.
โThose individuals will not qualify for the auto loan they otherwise wouldโve been able to purchase,โ Jones said. โThat can cause a drop in vehicles being sold.โ
When credit scores fall, interest rates go up. That makes borrowing more expensive. It becomes a cycle of financial strain. Lower credit also affects renting homes, getting insurance, and even job applications in some industries.
Trump Administration to Restart Efforts on the Total Student Debt Problem
Student debt continues to be a massive issue in the U.S. More than 42 million Americans owe over $1.6 trillion in student loans. If the borrowers in late-stage delinquency default, the total percentage of borrowers in default would rise to nearly 25%. Thatโs one in four borrowers struggling to pay off their education loans.
The restart of collections comes after several years of legal fights and political debates over debt forgiveness. The Biden administration tried to forgive billions in loans, but those efforts faced setbacks in court. Now, the federal government is moving forward with collecting defaulted debt.
Not All Defaulted Borrowers Will Be Impacted the Same Way
While the restart of collections may sound like a blanket policy, not everyone will be equally affected. Only borrowers with wages or benefits like Social Security can have money withheld. Some may not lose large amounts of income, depending on their situation.
โItโs clear that it means less money in peopleโs pockets, but it might not be that much money for these borrowers,โ said Brent Evans, a professor of public policy and higher education at Vanderbilt University.
Evans also pointed out that the current economy is filled with uncertainty, making it difficult to measure how much damage this policy might do.
โThe uncertainty in the economy is near an all-time high,โ Evans said. โThatโs a broad concern and therefore itโs very difficult to predict the impact of any one of these levers.โ
The Government Says Itโs About Fairness and Clarity
Despite concerns, the Department of Education says the policy is necessary. Officials argue that taxpayers should not be on the hook for unpaid student loans. They also believe that the new approach provides a clear path forward for borrowers after years of mixed messages.
โAmerican taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,โ U.S. Secretary of Education Linda McMahon said. โThe Biden Administration misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear.โ
By enforcing repayment, the government also hopes to add funds to the U.S. Treasury. This could help reduce a small portion of the nationโs $36 trillion debt.
Some Say the Timing Couldnโt Be Worse, But Certainty Is Needed
Experts like Michael Jones agree that the timing isnโt great. However, they believe it was time to make a decision. Years of delays and policy shifts left borrowers unsure about their future. Now, they know where they standโeven if the immediate cost is painful.
โIt is short-term pain but it actually brings certainty,โ Jones said. โIt gives clarity for decisions these borrowers need to make about their future.โ
He also pointed out that the government could have restarted payments when the economy was stronger.
โWhen the economy was booming a few years ago, these payments couldโve been reintroduced then,โ Jones said. โItโs unfortunate timing now when the economy is looking at a potential recession. But itโs probably time to rip the Band-Aid off.โ
