STRUGGLING STUDENT LOAN BORROWERS FACE FINANCIAL CHALLENGES WITH COLLECTION EFFORTS RESUMPTION
Loan collections forthcoming may exacerbate economic predicament for student loan debtors.
Millions of student loan borrowers could be in a tight spot as collection efforts gear up.
According to the Department of Education, roughly 9 million borrowers have either defaulted or are delinquent on their federal student loans. This alarming figure is set to rise as the department is set to restart collections starting May 5, leading to wage garnishment for some.
The past five years have witnessed a tumultuous journey for student loan borrowers, with pandemic pauses, court cases, and changes in administrations causing confusion. Now, the looming threat of collections has many borrowers anxious.
One Reddit user voiced concerns, stating, "I'm not against paying my loans back, I took them out and went to school. But without affordable repayment options or programs, it just seems really suffocating for a large amount of borrowers."
COLLECTIONS MAY AFFECT PAYMENT OF OTHER DEBTS
Borrowers who haven't made payments for 270 days could have up to 15% of their income, tax refund, or federal benefits seized and forwarded to their loan holder from this summer. This strain on income could pose complications for other segments of student loan borrowers' financial lives.
American consumers already grapple with managing their debt. In a study by digital finance company Achieve, 33% of consumers admitted their debt is unmanageable, with 36% unable to pay all their bills on time.
"Many borrowers may have taken on more debt than they can manage during the moratorium, and student debt may now sit lower in the payment hierarchy," wrote Shandor Whitcher, a Moody's Analytics economist, in a blog post.
Dealing with additional debts becomes challenging for student loan borrowers with multiple debts, especially when a portion of their income is seized through wage garnishment. According to Achieve, 37% of student loan borrowers who missed a payment on any type of debt attributed it to running out of money.
POOR CREDIT SCORES CAN INCREASE COST OF NEW DEBT
The average FICO score dipped in February, chiefly due to about 2.7 million delinquent student loan borrowers reporting their missed payments to credit bureaus for the first time in five years.
Research from the Federal Reserve Bank of New York suggests that over 9 million borrowers carry delinquent student loan debt, and their scores could fall by up to 171 points.
Borrowers with lower scores often hold more debt and view their debt as unmanageable more frequently than those with higher scores, according to Achieve. Missed payments remain on a borrower's report for seven years, resulting in decreased credit limits, increased interest rates on new loans, and limited access to credit.
"While [the average credit score fell] only two points right now, it's going to continue to get worse," said Jack Wallace, director of government and lender relations at Yrefy, a private student loan company.
Default borrowers can take steps to steer clear of the adverse effects of wage garnishments and collections by opting for loan rehabilitation, consolidation, full payment, or negotiating a payment plan with their loan servicer. It's crucial to take action promptly, as the Department of Education aims to restart collections on defaulted loans starting May 5, 2025.
For additional help navigating the system, consider reaching out to congressional leaders or state student loan ombudsmen.
- Starting May 5, borrowers who have defaulted or are delinquent on their federal student loans could face wage garnishments, with up to 15% of their income being seized.
- Poor credit scores can increase the cost of new debt, as the average FICO score dipped in February due to delinquent student loan borrowers reporting missed payments.
- According to Achieve, 37% of student loan borrowers who missed a payment on any type of debt attributed it to running out of money, indicating that the strain from collections on personal-finance might be extensive.
- Borrowers who have faced loan defaults can mitigate the impact of collections and wage garnishments by opting for loan rehabilitation, consolidation, full payment, or negotiating a payment plan with their loan servicer.
