Delinquent federal student loan borrowers are staring down the prospect of wage garnishment or involuntary collections — and it’s causing them to weigh reorienting their finances, even if it means falling behind on other payments.
That’s according to a new TransUnion survey of federal student loan borrowers, which found they would consider putting student loan payments ahead of bills for credit cards and personal loans, though mortgage and auto loan payments were prioritized above all else.
Typically, borrowers put student loans at the bottom of their payment hierarchy, said Michele Raneri, vice president and head of US research and consulting at TransUnion.
“Now that they’re finding out they might have their wages garnished, or their tax refunds withheld, or even Social Security benefits withheld, they’re saying they would not pay their unsecured personal loans or not pay their credit cards, but they’re going to find a way to pay that student loan, the auto, and the mortgage,” Raneri said.
Most borrowers who miss student loan payments say they simply can’t afford them or have to pay other bills first, according to the survey of 508 student loan borrowers.
Already, Americans behind on their federal student loans saw their delinquency rates on other types of credit shoot up between December and June, especially among credit cards and personal loans, TransUnion said. That tracks with broader trends showing strain, with the New York Fed finding that credit card balances hit $1.21 trillion in the second quarter of this year, up 5.87% from levels seen a year ago.
“It looks like [delinquencies] could already be happening, but we think it’s going to happen significantly more once those involuntary collections begin,” Raneri said.
The Trump administration announced in April that collections of defaulted student loans — those that hadn’t been paid in at least 270 days — would resume the following month, with required notices about wage garnishments expected to hit borrowers by late summer. The penalties from these collections can be serious: Borrowers can lose up to 15% of their disposable wages, and the government can withhold money from Social Security benefits and tax refunds.
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It’s another chapter in the see-sawing student loan saga brought on by the pandemic. Interest accrual and the requirement to make payments were completely paused for federal loan borrowers in March 2020. In 2022, the Biden administration attempted to cancel between $10,000 and $20,000 of student loans for up to 43 million borrowers, but that effort was struck down by the Supreme Court.
