As the U.S. economy grapples with ongoing instability and the lingering effects of tariff-driven price hikes, a new crisis is emerging for millions of student loan borrowers. This summer, nearly 2 million Americans could see their paychecks garnished by the federal government as a wave of student loan defaults sweeps the nation.
A Surge in Defaults
According to a recent TransUnion study, a significant number of federal student loan borrowers are expected to cross the 270-day delinquency threshold in July, officially placing their loans in default and opening the door to wage garnishment. Just a month ago, the estimate stood at 1.2 million, but projections now suggest that another 1 million borrowers could default by August, with an additional 2 million at risk in September. While not all of these individuals will immediately face garnishment, some are negotiating repayment plans—the trend is alarming.
Resumption of Collections After Five-Year Pause
The Department of Education, which resumed debt collection on defaulted loans last month, has confirmed that wage garnishment will restart this summer after a five-year hiatus. This means that up to 15% of the paychecks of those with overdue federal student loans could be automatically deducted. In addition to wage garnishment, federal officials have warned that tax refunds and other federal benefits may also be withheld from borrowers who are unable to make payments.
The End of Pandemic-Era Relief
Since March 2020, the government has halted collections on defaulted student loans as part of pandemic relief measures. During this period, borrowers experienced a whirlwind of policy changes, inaccurate payment information, and unfulfilled promises of loan forgiveness. Now, as relief measures expire, many are facing sharply increased payments and plummeting credit scores.
Wider Economic Impact
The Federal Reserve has warned that more than 9 million borrowers could see significant drops in their credit scores as delinquencies begin appearing on credit reports in the first half of 2025. This could have far-reaching consequences, affecting borrowers’ ability to secure housing, buy cars, or access other forms of credit.
Looking Ahead
As the summer unfolds, the number of Americans at risk of wage garnishment is expected to rise further, unless more borrowers can successfully renegotiate terms with their lenders. The resumption of aggressive debt collection underscores the ongoing challenges facing millions of student loan borrowers—and the broader economy—amid uncertain times.