The Blubber

The Trump administration’s decision to resume collections on defaulted federal student loans is expected to have wide-reaching effects on borrowers who are behind on their payments.

One of the most immediate consequences is that borrowers in default may face garnishments on their wages, tax refunds, or even Social Security benefits.

But the financial fallout may extend beyond student loans. According to a recent analysis by the Federal Reserve Bank of New York, the return of these collections could create a “spillover effect,” making it harder for consumers to keep up with other financial obligations.

Disposable income likely to shrink as payments resume
“We were obviously somewhat concerned about potential spillovers to delinquencies on other types of debt,” said researchers from the New York Fed during a press briefing earlier this month.

During the payment pause, borrowers had more flexibility to meet other obligations—like credit cards or car loans—using money that would otherwise go toward student debt. Now, with those student loan payments back on the table, that financial cushion is gone. “So that could put pressure on their ability to pay these other loans,” the researchers said.

Reports suggest the renewed collection activity could pull billions from household budgets. JPMorgan analysts estimate that monthly collections on defaulted student loans could reduce disposable personal income by between $3.1 billion and $8.5 billion.

“Part of the reason some people are increasing their credit card debt is because student loan payments are back — that’s the spillover effect,” said Ted Rossman, senior industry analyst at Bankrate. “Something’s got to give.”

"It’s just money that can’t go to other financial things"
The Department of Education had halted collections on defaulted loans since March 2020. After the pandemic-related pause on student loan payments ended in September 2023, the Biden administration introduced a year-long “on-ramp” period to protect borrowers from the consequences of missed payments. That grace period officially ended on September 30, 2024, and the department resumed collections on May 5, 2025.

Whether through wage garnishment or resumed payments by borrowers hoping to return to good standing, these collections are expected to strain personal finances.

“It’s just money that can’t go to other financial things,” said Matt Schulz, chief credit analyst at LendingTree.

As the pause lifted and collections resumed, delinquencies on student loans spiked. The New York Fed reported that nearly 8% of total student loan balances were 90 days or more past due in Q1 of 2025, a sharp rise from under 1% in the previous quarter.