The process of collecting defaulted student loan payments has resumed after a five-year pause due to COVID-19, and the outlook is fairly bleak. As of February, more than 20% of all federal student loan borrowers with payments due are over 90 days delinquent.
According to data from TransUnion, the current student loan delinquency rate stands at 20.5%—the highest on record. That figure is nearly double the rate from February 2020 and more than twice the current delinquency rate for credit cards.
This week marks the end of a yearslong pause that began when the Department of Education suspended federal student loan payments in March 2020. The policy remain in effect throughout the Biden administration.
During the pause, loan servicers were directed not to report delinquencies to credit bureaus unless borrowers were 90 days or more past due on federal student loan accounts. Borrowers who were current on their payments did not face any penalties during this time.
An Avalanche of Default
Roughly 5 million student loan borrowers are currently in default, according to the DoE. An additional 4 million are in late-stage delinquency—91 to 180 days behind on payments. DoE estimates that by this summer, nearly 10 million borrowers could be in default.
The impact of these numbers will ripple through the credit industry. Borrowers should be prepared for collection efforts to intensify.
“With the winds changing in Washington, students and graduates will need to brace themselves for aggressive government collection actions,” said Brian Riley, Director of Credit at Javelin Strategy & Research. “This will involve third-party collection agencies and the right to reduce loans to judgment.”
Credit Scores Will Feel the Pinch
The New York Fed has estimates that more than 9 million student loan borrowers will see significant declines in their credit scores during the first half of 2025.
“Many credit bureau reports will begin to reflect student debt and their delinquent statuses,” Riley said. “What the industry needs to anticipate is that credit scores will begin to deteriorate as the loans get classified as delinquent.
“Even for those who are not delinquent, they might find that their ability to repay a new loan may be diminished because of the student loan liability. One thing is for sure: the new world of student loan collections will be harsher than prior years.”
