As the Department of Education prepares to resume collections on defaulted federal student loans in May, a new wave of financial consequences is looming—not just for borrowers’ paychecks, but for their credit scores and long-term financial health.
A New Era for Credit Reporting
Unlike the initial payment pause, which shielded millions from negative credit reporting, 2025 marks the return of both aggressive collection efforts and adverse credit activity.
Borrowers who have not resumed payments since the end of the pandemic-era grace period will soon see missed payments reflected in their credit reports, potentially lowering scores and limiting access to future credit.
The Vicious Cycle of Default
Experts warn that the Department of Education’s collection tools—tax refund offsets, wage garnishments, and Social Security benefit withholdings—can trap borrowers in a cycle where payments barely cover accruing interest and fees.
This makes it especially challenging for those already struggling to escape default, as the impact on credit can extend far beyond the immediate loss of income.
Who’s Most at Risk?
Recent research highlights that borrowers who didn’t finish their degree or are unemployed are most likely to default, and thus most vulnerable to both collections and credit damage. With nearly 25% of federal student loan borrowers either in default or severe delinquency, the ripple effects could be felt across the economy.
What Borrowers Can Do Now
There’s still a window for action: borrowers can contact their loan servicer or the Department of Education to explore income-driven repayment plans, consolidation, or rehabilitation options to avoid the harshest penalties.
The Department is ramping up outreach, but the onus is on borrowers to act before collections and negative credit reporting begin in earnest.
Bottom Line
The Department of Education’s restart of student loan collections isn’t just about recouping lost payments—it’s a turning point that could reshape the financial futures of millions. For those at risk, understanding the intersection of collections and credit is more urgent than ever.