Millions Face Coming Wage Deductions Over Defaulted Student Loans
By Steve Cocheo, Senior Executive Editor at The Financial Brand
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Executive Summary
- Millions of federal student loan borrowers may default this summer and fall. They face measures like Department of Education wage garnishment.
- Borrowers’ lost income is just one way that consumers’ financial lives could be impacted. For private lenders, gray credit history and decimated credit scores could turn one-time good prospects into risky ones.
- Payment patterns on bank cards and unsecured personal loans have already been impacted.
- One bright spot: Many student loan borrowers have been paying extra on other debt like credit cards. Reallocating that money toward student loans could keep them out of trouble.
Millions of federal student loan borrowers face the possibility of wage garnishment by September — perhaps sooner — as a growing portion of borrowers in repayment mode may go into default.
At the same time, many student loan borrowers who have gone into serious delinquency status will continue to see their credit scores rocked and their credit status shaken. Those who default could be unable to obtain mortgages for years and be unable to obtain other types of credit as well.
The ripple effects of growing levels of serious loan delinquency on existing mortgages and other forms of consumer credit varies by the type of debt the borrower holds. The strongest impact seen thus far has been on credit cards and unsecured personal loans.
All of these observations come from an analysis by TransUnion. But the credit bureau also detected a curious development. Many consumers who are veering towards serious delinquency on their federal student loans have actually been making excess payments — beyond monthly required or minimum payments — on their other debt. The company points out that they could avoid becoming seriously delinquent on their student loans if they reallocated those payments to cover their federal debt.
What Happens When Student Loan Borrowers Go 90+ Days Past Due
In federal student lending, serious delinquency begins at 90 days past due and that is typically when servicers report the loans as seriously delinquent. Actual default is declared if and when a loan goes 270 days past due. At that point collection action can begin, including wage garnishment. Notably, federal student loans cannot be discharged in bankruptcy, as can many other forms of consumer debt.
TransUnion research found that 34% of borrowers who are 1-89 days past due are paying at least $1,000 more than they need to every month on their other consumer debt, according to Joshua Turnbull, SVP and consumer lending business lead.
Turnbull says the good news — “such as it is” — is that these consumers, at least, have the cash to cover their student debt payments.
“So, it’s not as if they can’t do it,” says Turnbull. “It would be great if they would figure this out before they get the student loan delinquency reported on their file.” He says it is unclear from the company’s credit files why these consumers haven’t shifted their loan payment budgets towards satisfying the federal debt. Turnbull says it is possible they are unclear on their obligation to begin repayments again. Alternatively, the long period of federal forbearance may have ingrained the idea that payments didn’t have to be made.
They need to get clear in a hurry.
Once a borrower goes into serious delinquency, they can’t take it back merely by curing the shortfall, Turnbull explains. Only about 9% of people who had gone into serious delinquency on federal student loans cure their delinquency and bring their accounts current again. The higher the borrower’s initial credit score, the more likely they are to cure serious student loan delinquency, according to TransUnion’s research.
“Ninety days past due seems to be a wakeup call for many, the point where they’ll decide, ‘OK, I’m going to pay for this, I’m going to bring it current’,” says Turnbull. “But by then you’ve already done material damage to your credit score.”
Even when the loan is brought up to date, the consumer’s credit file will show the delinquency for years. TransUnion research indicates that the stronger a consumer’s original credit tier, the more a student loan default will slam their credit score. Among super prime borrowers, in December 2024-April 2025, the average change in score came to a whopping -174 points, versus an average drop among all credit tiers of -60 points. These figures are based on the VantageScore 4.0 credit score scheme, which has a top score of 850.
The odds of seeing a delinquency cured aren’t that strong, Turnbull adds. “Once you’re at 90 days delinquent, it’s likely something’s gone wrong.”
Access to credit tightens up for most who fall into student loan delinquency, he adds. Even if a borrower can’t cover the payments, he continues, there are multiple programs under which they can apply for student loan debt restructuring and other relief.
“My fear is that consumers aren’t being proactive, sorting things out before there are consequential events,” says Turnbull. Yet, he says, the federal government can garnish up to 15% of a defaulted borrowers’ pay for repayment.
Read more: Are Consumers Buried Under Too Much Debt? A New Report Says Maybe Not
Trending Toward Higher Serious Delinquencies and Rising Defaults
The Trump administration’s Department of Education began resuming collection actions for the federal loans in early May after a long hiatus that began during the pandemic and continued under the Biden administration.
In an update of its earlier analysis, TransUnion found that 31% of federal student loan borrowers in repayment status are 90 days past due or beyond in April, the latest figure available and a record. (The firm states that 0.3% of those borrowers are in default already.) By comparison, the number hit 20.5% in February and 11.7% in February 2020 just before the pandemic began. The percentage was at 30.6% in March. The company notes that the latter figure may indicate that the tally is peaking.
Based on the number of borrowers now in serious delinquency, TransUnion estimates that approximately 1.8 million could reach default status and be subject to garnishment in July. An additional 1 million borrowers could default in August, and still more — 2 million — in September.
Turnbull says that based on his experience the chances that someone brings their account back to current status once they are between 180 and 270 days past due are much less than doing so between 90 and 180 days past due.
“Within a couple of months, we will have a really good sense of what the ceiling looks like, in terms of delinquency and what we expect to roll into default,” says Turnbull.
How much more is coming? TransUnion found that as of April 24.5% of federal student loan borrowers are past due but have not hit the 90-day mark — yet.
Read more:
Why Lenders Must Monitor the Ripple Effects of Student Loan Delinquencies
As shown in the chart below, many borrowers for auto, bank card, mortgage and unsecured personal loans don’t have federal student loans. However, there is exposure in each category to consumers who are at the repayment stage of their student loans. At present the exposure is highest among auto loans and unsecured personal loans, by percentage, and in credit card lending, by number of consumers affected.
The chart below tracks the correlation between student loan performance and performance of bank card credit lines, in terms of serious bank card consumer delinquency rates.
By contrast, so far, auto credit saw modest falloff in payments, when correlated with the performance of federal student loan payment. Mortgages showed only slight deterioration when evaluated this way.
Who gets paid first? The specter of garnishment may in time make consumers pay federal student loan installments first, although historically they haven’t been high in the hierarchy of what debt consumers prioritize.
“If my paycheck dropped by 15%, it would be a motivating factor to me to bring my account current,” says Turnbull. “But we’re way too early in terms of the number of people who have actually hit default status to understand the impact there.”
In addition, tax refunds and government benefits can be withheld if someone defaults on a student loan, as well.
Student Loan Upset Challenges Consumer and Mortgage Lenders
As this situation develops, Turnbull adds, lenders will be grappling with credit decisions that will be hard to parse.
“Let’s say I’m a prime-and-above lender, and I have someone applying for credit like this,” says Turnbull. “Everything is pristine on their credit report, and they make plenty of money. But six months ago, they had a 90-day delinquency on a student loan, which has brought their credit score below where I would typically underwrite it.”
“How do I feel about that?,” says Turnbull. “If the loan’s back to being current, do I overlook that? Do I not overlook it?”
Each institution will have to figure this one out.
