As Repayment Resumes, Student Loan Garnishments Loom Over Consumer Stability

Deep into the second year since the resumption of federal student loan repayments, a renewed surge in garnishments is clouding the financial horizon for millions.

The Department of Education resumed involuntary collections, including wage garnishments, even as consumers continue to battle inflation and hefty debt. Lenders seeking stability are finding a volatile environment instead.

Roughly 6 million borrowers are behind 90 or more days, a number estimated by TransUnion. Some 2.2 million have seen their credit score drop by 100 points or more.

Garnishment reduces take-home pay and disrupts budgets, resulting in missed payment on other debts. It’s the spillover effect causing banks, fintech lenders, and credit analysts to reconsider exposure.

It should come as no surprise that with accelerating collections and rising pressure on borrowers, we can expect a rockier credit market. Policy moves and borrower activism have the power to reshape the playing field — and lenders can be forced to adjust just as quickly.

The impact of garnishment extends far beyond student loan servicing. Delinquencies are spilling into auto loans, charge cards, and other consumer loan products.

That’s a big deal for risk groups that have seen abrupt change in the borrower behavior — just when most lenders had gotten comfortable with a return to normal conditions after the pandemic.

The resumption of collections combined with ongoing economic uncertainty means banks will need to review underwriting assumptions and prepare for broader downstream effects. As regulators, employers, and lenders adjust, the pace of the disruption is expected to increase.

The effect on the consumer also makes it harder for them to recover. Borrowers on stable payment schedules can be surprised by aggressive collections, especially those who are just weeks away from entering default status, defined as not making a scheduled student loan payment for at least 270 days.

Garnishment can lead an employer to withhold a portion of an employee’s pay and make it harder for households to positively engage with lenders or advisors, which can compound a borrower’s stress level.

Most educators are urging financial institutions to devote more funds to outreach efforts beyond boilerplate disclosures. More advance communications — especially when matched with hardship assistance or payment programs based on income — may prevent defaults from spiraling out of control.

When borrowers feel ignored, they become more reluctant to cooperate. Advance intervention can, however, prevent loss of relationships and protect portfolios.

Some community lenders and credit unions are already moving in that direction. By partnering with non-profit counseling agencies and integrating flexible payment tools, they’re contacting distressed borrowers before garnishments take effect.

That preventive approach could benefit responsible lenders in a marketplace where reputational risk can quickly gain traction.

There is also concern for younger borrowers who are inexperienced in the credit system. Relatively few among them have had dealings with loan servicers or had a go at negotiating hardship clauses. Garnishment can be the line between a short-term financial misstep and a lifelong fall into the subprime sector for them.

To ease the financial burden of student loan debt for millions of borrowers, the Biden administration paused student loan payments for over three years during the COVID-19 pandemic.

In May 2025, the new administration resumed aggressive collections among defaulted student loan borrowers, including garnishing wages, holding up tax refunds, and Social Security setoffs.

Wage garnishment will impact millions of borrowers, dialing up financial pressure for Americans.

TransUnion estimates that 1.8 million borrowers face potential garnishment in July, and another 3 million are on the horizon for the next few months.

In its June report, TransUnion reported a 31% delinquency ratio among delinquent student loan borrowers — the highest since tracking began. Of the 6 million affected, many had been judged prime or near-prime borrowers.

Not updating models with fresh information frequently enough can lead lenders to underprice risk and extend credits that won’t be paid back.

“Wage garnishment can have a cascade effect,” said Charlie Wise of TransUnion. “Borrowers don’t just become delinquent on student loans — they begin to skip payments on everything.”

Risk managers are reconsidering the old credit score inputs and experimenting with additional sources, such as measures of cash flow or real-time verification of incomes, to improve the predictive ability of loan decisions. The trend could accelerate broader changes already underway among credit models.

For employers, garnishment orders can add administrative inconvenience and lead to problematic conversations with affected staff. For borrowers, the abrupt loss of a steady income can initiate an economic free fall.

Consumer organizations point to rising numbers of individuals caught unaware of paycheck deductions, often with little forewarning.

Analysts say that families are cutting back on discretionary spending as more income goes toward debt payment. Some economics professionals are concerned that a general lowering of consumer consumption can result in economic drag if the rate of garnishments increases by year-end.

While the macroeconomic effects are difficult to predict, local economies can be subject to tighter retail cycles as the ability to borrow declines.

Financial institutions are preparing in a number of different ways. Some are expanding borrower outreach and short-term hardship programs. Others are embracing real-time cash flow analysis for the purpose of stress indicator detection earlier in the lending cycle.

In the future, borrower interaction and transparency need to become strategic priorities. The lenders that can best render real assistance, evolve the quickest, and are the most communicative — not to mention, when it’s scarce, build loyalty — can potentially end up protecting portfolio performance.