With the U.S. Department of Education’s “involuntary collections” on federal student loans now underway, millions of borrowers face a “default cliff,” reports show.
A new analysis by TransUnion found that as of April, 31% of student loan borrowers with a payment due are in “late-stage delinquency,” or over 90 days past due on payments. That’s the highest share the credit bureau has ever recorded.
As borrowers face repayment challenges — including questions about their loans and loan servicers as well as confusion over the current status of some income-driven repayment plans — more risk falling into delinquency and eventually defaulting, according to Joshua Trumbull, senior vice president and head of consumer lending at TransUnion.
“We don’t think this represents the ceiling,” Trumbull said. “Defaults will continue to tick higher.”
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Of the 5.8 million delinquent borrowers, nearly one-third, or roughly 1.8 million, could reach default status in July, according to TransUnion. An additional 1 million are estimated to reach default status in August, followed by 2 million more in September.
A borrower enters default status, and is subject to collection actions by Education Department, once payments are 270 days past due.
A recent study by the Pew Research Center also found an impending “default cliff” or “a coming wave of further student loan defaults — which put borrower financial stability and taxpayer investments at risk.”
“This default wave is expected to begin this fall,” said Brian Denton, an officer on the student loans team at Pew.
Defaulted borrowers at risk of wage garnishment
Student loan collections efforts had largely been on pause since the pandemic began in March 2020, but Trump administration officials have said that taxpayers shouldn’t be on the hook when people don’t repay their education debt.
The move to restart collection activity began last month. “Borrowers who don’t make payments on time will see their credit scores go down, and in some cases their wages automatically garnished,” U.S. Secretary of Education Linda McMahon wrote in a Wall Street Journal op-ed in April.
Wage garnishment could start as soon as June for some borrowers, but those in default will receive a 30-day notice before a portion of their paycheck is withheld, a spokesperson for the Education Department previously told CNBC.
Credit scores sink for past-due borrowers
Meanwhile, consumers who have fallen behind on payments in recent months have seen their credit scores fall by 60 points, on average, TransUnion also found. For super prime borrowers — or those with credit scores above 780 — who were seriously delinquent, scores sank as much as 175 points. Credit scores typically range between 300 and 850.
“Consumers may find themselves shocked by the dramatic and immediate impact that a default can have on their credit scores,” Trumbull said.
The credit score implications are worse for borrowers with better scores, research shows.
Because borrowers in less-risky credit tiers typically have fewer dings on their credit, any derogatory mark “has the potential to have a significant and jarring impact,” according to TransUnion. In general, the higher your credit score, the better off you are when it comes to getting a loan.
The Federal Reserve Bank of New York also cautioned in a March report that student loan borrowers who are late on their payments could see their credit scores sink by as much as 171 points.
Initially, those past-due borrowers benefitted from the pandemic-era forbearance on federal student loans, which marked all delinquent loans as current. Median credit scores for student loan borrowers rose by 11 points between the end of 2019 to the end of 2020, the Fed researchers found. However, that relief period officially ended on Sept. 30, 2024.
“We expect to see more than nine million student loan borrowers face substantial declines in credit standing over the first quarter of 2025,” the Fed researchers wrote in a blog post. In May, the New York Fed reported that among borrowers with a payment due, nearly one in four, or 24%, were behind on their student loans in the first quarter.
“Although some of these borrowers may be able to cure their delinquencies,” the Fed researchers said, “the damage to their credit standing will have already been done and will remain on their credit reports for seven years.”
Lower credit scores could result in reduced credit limits, higher interest rates for new loans and overall lower credit access, the researchers also said.
Both VantageScore and FICO reported a drop in average scores starting in February as early- and late-stage credit delinquencies rose sharply, driven by the resumption of student loan reporting. Borrowers who are late on their payments could see their credit scores tank by as much as 129 points, VantageScore reported at the time.
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