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TAKEAWAYS KEY
- According to the Department of Education 5 million borrowers defaulted on federal student loans and 4 million are in arrears.
- The Department of Education will resume wage garnishment for defaulted students this summer. This will make it harder for the student to pay other bills.
- The defaulted student loans borrowers will have a harder time and pay more for new debt because of the collections and lower credit scores.
As collection efforts resume, millions of student loan borrowers who struggle to make payments may soon find themselves in a difficult situation.
The Department of Education has reported that 5,000,000 borrowers have defaulted in their federal student loans. It expects 4,000,000 more to default over the next few weeks. Starting May 5, the Department of Education will resume the collection process for defaulted loans. This could lead to some borrowers being forced to garnish their wages.
Over the last five years, pandemic-era pauses, court cases related to the Saving on a Valuable Education repayment plan, and a change of administrations have caused tumult and confusion for many student loan borrowers. Some borrowers are now in distress because of looming collection deadlines.
“I’m not opposed to paying my loans back. I took them out, and went on to school. But without affordable repayment options or programs, it just seems really suffocating for a large amount of borrowers," one user with student loans posted on Reddit.
Collections will make it more difficult for borrowers to pay off other debts
Borrowers who are not paying their student loan for at least 270 consecutive days may see up 15% of their income or federal benefits, such as tax refunds, withheld from them and sent back to the lender. This could happen this summer. And that could have repercussions on other parts of student loan borrowers' financial lives.
The American consumer is already struggling to pay off their debt. In a recent study by digital finance company Achieve, one in three consumers said their debt is unmanageable, and 36% said they can't 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.
It can be difficult for student loan borrowers to pay additional bills if they have other debts, and a portion of their income is taken from them by wage garnishments. According to Achieve 37% of student loans borrowers who missed a payment due to any type of debt did so because they were out of money.
Credit Hits can make new debt more expensive
The average FICO scored fell in February. This was mainly due to the fact that about 2.7 millions delinquent student loans borrowers missed payments for the first five years.
Federal Reserve Bank of New York Research estimates that 9 million borrowers are delinquent on their student loans and could see a score drop as high as 171 points.
According to Achieve.com, those with lower scores tend to have more debt. They are also more likely to describe their debt as unmanageable. In addition, missed payments stay on a borrower's report for seven years, leading to reduced credit limits, increased interest rates on new loans, and less 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.
Defaulted loan borrowers can consolidate or enter into a rehabilitation program in order to avoid the negative effects of wage garnishments. Delinquent borrowers still have some options before they become defaulted. They can sign up for a lower payment plan under an income-driven repayment program or apply for forbearance.
