Written by: Eric Bank
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
Key Takeaways
- With the resumption of federal student loan collections, state-level borrower relief programs have come forward as strategic policies that mitigate credit risk and economic exposure for lenders.
- These state actions are reconfiguring compliance expectations and affecting borrower behavior with consequent impact on underwriting and servicing.
- Lenders must consider state interaction as a changing landscape in borrower risk management and in regulatory navigation.
State ombudsman offices are stepping in to help those in their state who are among the more than 5 million delinquent borrowers of student loans and close to 10 million who are in danger of default.
These aren’t simply consumer complaint offices. State ombudsman in 16 states and the District of Columbia are transforming into regulatory hubs, encouraging outreach initiatives, influencing borrower behavior, and referring cases to federal agencies.
That means they’re also indirectly influencing delinquency trajectories, credit performance, and even future underwriting — developments that lenders should take note of.
When the U.S. Education Department’s reinstated collections on defaulted student loans in May 2025, it triggered a wave of borrower bewilderment. But another ripple effect for lenders is how some states are filling in the gap.
These ombudsman offices have evolved beyond their original narrow mandates. Many now serve as coordination centers for outreach campaigns, “Student Loan 101” workshops, and escalations to federal regulators.
State Actions Influence Credit Quality
Timely help to borrowers can prevent them from falling into default. It’s not only good for them — but for credit card, auto, or personal loan lenders holding such debts. Defaulting borrowers also fall delinquent on other products.
State-run intervention and narrow forgiveness programs can short-circuit this cascade and bring down aggregate charge-off levels.
One example is Connecticut’s repayment program, which awards a maximum of $20,000 to graduate students who pay back loans as part of community service.
Over $2 million in payments have already been made. These schemes form pools of less-risky borrowers in an otherwise high-risk climate.
A Patchwork of Oversight Adds Complexity
State involvement results in one consequence in particular for servicers and lenders: operational fragmentation. Nineteen states currently have student loan servicer registration. A number of others have introduced Borrower Bill of Rights legislation or new interest rate caps.
The end result is a compliance landscape that becomes increasingly complicated by the month.
The risk this trend bodes for spilling into private student loans, fintech lending, or non-secured credit is real. Cross-border lenders will have to track new disclosure regulations, registration levels, and servicing standards — on occasion in the absence of federal harmonization.
Winston Berkman-Breen of the Student Borrower Protection Center emphasized this trend. He indicated states have three major tools at their disposal: enforcement, policy litigation, and direct borrower outreach. All three impact how lending entities direct legal, servicing, and risk dollars.
Shifting Borrower Behavior and Expectations
When states provide workshops, loan forgiveness incentives, or emphasize Public Service Loan Forgiveness routes, they aren’t simply teaching borrowers — they’re conditioning them. This instills a new borrower attitude: one demanding clarity, accommodation, and help.
This change creates opportunities for lenders who lean in. Financial institutions that develop hardship help portals, present IDR-like structures, or enter into state partnership arrangements may find increased acquisition and retention among student-dominant borrower segments.
Integrating relief programs or assistance can help borrowers along their credit journey and positively impact lenders with increased retention and acquisition.
Alternately, those who don’t adapt may face erosion or negative servicing comments.
Michele Zampini of The Institute for College Access and Success put it bluntly: “They’re helping at the margins, but the core system remains broken.” That places a burden on lenders to plug the gap — or risk being criticized in concert with federal dysfunction.
Economic Spillover Is a Material Risk
Mississippi’s conditional delinquency rate has risen to nearly 45%, and a number of other states have rates in excess of 30%. These aren’t random numbers. They indicate a potential systemic drag on consumer credit markets, particularly in those places where borrower protection is lowest.
Higher delinquency among student loans is linked with less vibrant local economies, lower home purchase activity, and a heavier burden on public services. That’s a three-front threat for lenders: declining originations, increasing delinquencies, and wider economic headwinds.
Strategic Takeaway for Lenders
State governments can’t write down or cancel the national debt, but they can increasingly influence its impact. Lenders who monitor these actions reap more than compliance benefits — they acquire knowledge of changing borrower norms and risk.
From servicer registration mandates to forgiveness-linked incentive payments, state activity is an underappreciated element in portfolio planning. It warrants as much analysis as rate movements or employment levels.
And with new federal proposals such as the One Big Beautiful Bill Act to overhaul repayment once more, change is the one constant. Lenders who expect those changes — both at the federal and at the level of all 50 states — will be in the best position to adjust.
