The U.S. Department of Education has resumed its efforts to collect defaulted student loans after a five-year hiatus. This pause, initiated in March 2020 as a response to the financial pressures of the COVID-19 pandemic, is now coming to an end, potentially placing added financial burdens on millions of Americans and impacting GDP growth. The department’s decision to restart collections is aimed at protecting taxpayers and assisting borrowers manage repayments in light of high delinquency rates, which are exacerbated by the staggering $1.6 trillion in student debt.
Economists from Morgan Stanley estimate that this renewed collection process could boost monthly payment obligations by $1 to $3 billion and might lead to a reduction in U.S. GDP growth by approximately 0.05 to 0.15 percentage points in 2025. Certain financial institutions, such as BFH and SOFI, are increasingly exposed to risks associated with unsecured loans. Morgan Stanley has given both companies an “underweight” rating due to heightened risks.
In contrast, SLM Corporation shows potential for growth despite concerns regarding credit quality among private student loan borrowers. A possible reduction in government support for programs like Grad PLUS may expand SLM’s market for private student loans. The financial burden of resuming loan payments falls heavily on younger and middle-income Americans, particularly those under 40 who hold more than half of all student debt.
Lower-income borrowers, who are three to four times more likely to struggle with payments compared to those earning over $100,000, face significant challenges. The risks for these borrowers include wage garnishment, offsets to benefits or tax refunds, and significant drops to credit scores. Despite potentially benefiting Treasury finances by prolonging the debt ceiling deadline through increased government revenue, consumer finance experts express concerns.
They view the resumption of loan collections as a “headwind” for consumers, adding to existing pressures from inflation and high housing costs. This situation raises important questions regarding borrowers’ ability to adapt and the likelihood that economic impacts could prompt a reevaluation of policies.