Recent estimates from Transunion reveal that around 2 million student loan borrowers risk missing payments this summer.
Approximately 6 million federal student loan borrowers have fallen behind, with over 90 days of missed payments. A significant portion of them, about a third, could default as soon as next month, as noted in an analysis released on Tuesday.
By August, Transunion predicts that another million borrowers will have defaulted, falling behind on payments for at least 270 days.
Entering default brings various consequences for borrowers, such as wage garnishments, tax refund withholdings, and potential cuts to Social Security benefits.
This shift follows recent actions by the Trump administration, which lifted a five-year pause on collections due to the pandemic. The government can now resume efforts to collect on unpaid student loans.
“We’re observing an increasing number of federal student loan borrowers reported as being over 90 days late on their payments, which raises the risk of entering default and triggering collection actions,” stated Michele Raneri, Transunion’s vice president and chief executive.
The portion of federal student loan borrowers who have been delinquent for more than 90 days has surged, going from around 20% in February to 31% in April—marking the highest level recorded.
Just to provide some context, about 12% of student loan borrowers were 90 days late in February 2020, right before the COVID-19 pandemic hit.
Delinquency itself doesn’t directly lead to wage garnishments, but it does negatively impact borrowers’ credit scores. The analysis shows that newly delinquent borrowers faced an average drop of 60 points in their credit scores.
On a somewhat positive note, the report suggests that late payment rates remained relatively stable from March to April and might have reached a peak.
Despite the potential for millions to be nearing default, only 0.3% of borrowers found themselves in that situation as of April, according to the company.
Raneri urged borrowers in financial distress to reach out to their loan servicers promptly to explore options such as income-driven repayment plans or tailored payment strategies.
Consequences of Defaulting on Student Loans
In May, about 195,000 borrowers who had defaulted were sent official notices by the Treasury Department, informing them that federal benefits could start being withheld as early as June.
The ramifications of default can be severe, with the government able to garnish wages, potentially taking up to 15% of a borrower’s salary.
The previous administration had suspended plans to withhold Social Security benefits, a move that could have safeguarded countless older Americans from significant reductions in their retirement checks, at least for the time being.
In total, nearly 43 million borrowers owe approximately $1.6 trillion in student debt, as mentioned by the Education Department in April.
Borrowers facing delays in payments can utilize government loan simulator tools to help design repayment strategies.
