What Effects Would Mass Student Loan Defaults Have on the US Economy?

Nearly 25% of the $1.6 trillion federal student loan portfolio could default in the near future, considering that nearly 10 million borrowers were over 90 days delinquent as of April 2025. Given that the U.S. Department of Education restarted collections on student loan defaults in May, and many borrowers are already facing tighter budgets, the broader economy could suffer long-term consequences if millions of workers have their wages garnished.

Understanding Student Loan Defaults

Typically, if a federal student loan payment hasn’t been made for at least 270 days past the due date, it goes from delinquent to being in default. Not only does defaulting hurt your credit score, but your full unpaid balance plus any interest also becomes immediately due. From there, your wages could be garnished, which is when your employer sends a portion of your paycheck to your lender. Another potential consequence is having your tax refund withheld and being unable to buy real estate.

In March 2020, the Education Department temporarily paused mandatory payments and interest on federal student loans. The deadline was extended multiple times and an additional on-ramp period was implemented. By May 2025, under the Trump administration, collections finally resumed on defaulted loans.

According to TransUnion, a record-high 31% of federal student loan borrowers are 90 or more days past due, as of April 2025, compared to 11.7% in February 2020. Fortunately, that rate appears to be plateauing, which suggests a growing awareness of the need to make payments.

Immediate Economic Impacts of Mass Defaults

On an individual level, defaults hurt the affected borrowers’ credit scores. Additionally, if wages are garnished up to the federal limit of 15% of disposable income, that leaves these borrowers with less spending money. The federal government benefits in the short term from the payments it would receive, although the long-term economic effects might be negative.

Entering into loan rehabilitation or loan consolidation can help borrowers in default, though that may still involve paying more than if you’d never defaulted due to accrued interest being added to the principal balance, collection fees, etc.

Long-Term Economic Consequences

If mass defaults lead to billions of dollars being seized via wage garnishment, that could hurt economic growth in the long run, leading to a net loss of federal revenue. For example, tighter personal budgets will likely reduce consumer spending, which could result in store closings and layoffs, meaning fewer people pay income taxes.

Meanwhile, given lower credit scores, defaulted borrowers would have a harder time qualifying for new loans and might even be ineligible for certain types of credit products, such as mortgages. Even if a prospective borrower were approved for a mortgage, lenders would likely still view them as a greater credit risk, so the loan would probably have a higher interest rate than it might’ve otherwise.

Mass defaults could also hurt economic mobility. A study from the National Bureau of Economic Research found that, after a court order forced National Collegiate to discharge thousands of student loans in default, affected borrowers eventually reduced their debt from other accounts by approximately 25%. This was due to a mix of lower demand for new credit and borrowers being able to make higher repayments. These borrowers were also more likely to move to new states, change jobs, and secure higher-paying work.

Based on this data, one can reasonably infer that policies favoring collecting defaulted debt over forgiveness would likely have the opposite effect—saddling borrowers with their other outstanding debts for longer and preventing them from pursuing employment opportunities that could improve their financial situations.

The Bottom Line

With the risk of mass student loan defaults on the horizon, individual borrowers could face wage garnishments that damage their credit scores and restrict their budgets. Meanwhile, the broader economy could suffer if millions of Americans have to limit their spending due to these garnishments. The federal government does stand to gain from a short-term boost in revenue by collecting on defaulted loans. However, this may be insufficient to offset the costs of increased unemployment and reduced economic growth.