The Trump administration’s plan to begin collecting defaulted college loan payments from millions of borrowers risks contributing to an economic slowdown at a time when the U.S. faces an elevated risk of a recession, some experts told ABC News.
Roughly 5 million borrowers will have their loans sent for collections beginning on May 5, the U.S. Department of Education, or DOE, said this week. Another 4 million people are in late-stage delinquency, meaning they could face collections within a matter of months.
Under the plan, the federal government will garnish wages from some of those borrowers, pulling money out of their pockets that may otherwise be spent and in turn drying up some economic activity, the experts said.
If the economy spirals into a downturn, they added, that lost spending would likely have been a smaller factor than other issues like tariffs and investor jitters, but the student-loan collections could compound the damage.
“The bottom line is: it’s not going to be good for the economy, given the current economic situation that’s already precarious,” said Scott Imberman, a professor of education policy at Michigan State University. “It’s an additional weight that you’re putting on until we tip into a potential recession.”
In all, some 42 million borrowers owe more than $1.6 trillion in student debt, according to the DOE.
If the borrowers currently in late-stage delinquency were to default on their own loans, it would bring the share of borrowers in default to nearly 25%.
The resumption of collections on defaulted student loans lifts a pause initiated in 2020 at the onset of the COVID-19 pandemic. Within weeks, millions of borrowers will need to begin repayment.
“The scale is quite large,” Michael Jones, an economist at the University of Cincinnati, told ABC News. “Every dollar that goes to pay the loans is a dollar that won’t be circulated into the economy.”
Consumer spending accounts for roughly 70% of U.S. economic activity. Potential downward pressure from student loan repayments comes as surveys show sour consumer sentiment in the face of potentially rising inflation and slowing growth.
The debt collections could also damage the credit score of many borrowers, since scoring systems are typically alerted when collections ensue, experts said. In such cases, they added, borrowers will face greater difficulty making big-ticket purchases like homes and cars for which they will need to take out a loan.
“Those individuals will not qualify for the auto loan they otherwise would’ve been able to purchase,” Jones said. “That can cause a drop in vehicles being sold.”
Brent Evans, professor of public policy and higher education at Vanderbilt University, acknowledged a heightened level of economic uncertainty but cautioned against alarm over the added risk posed by the student loan collections.
“The uncertainty in the economy is near an all-time high,” Evans said. “That’s a broad concern and therefore it’s very difficult to predict the impact of any one of these levers.”
Since the federal government will only claw back defaulted debt from wages or programs such as Social Security, the policy will not impact all defaulted borrowers, Evans noted.
“It’s clear that it means less money in people’s pockets, but it might not be that much money for these borrowers,” Evans said.
Student-loan collection will be paid to the U.S. Treasury, adding to government revenue and potentially easing a fraction of the nation’s $36 trillion debt.
“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” U.S. Secretary of Education Linda McMahon said in a statement on Monday. “The Biden Administration misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear.”
While the policy may reduce income for some borrowers, it clarifies the path forward for loan payments after years of uncertainty surrounding the Biden administration’s efforts to forgive loans, Jones said.
“It is short-term pain but it actually brings certainty,” Jones added. “It gives clarity for decisions these borrowers need to make about their future.”
“When the economy was booming a few years ago, these payments could’ve been reintroduced then,” Jones said. “It’s unfortunate timing now when the economy is looking at a potential recession. But it’s probably time to rip the Band-Aid off.”
