[Text/Observer Network Wang Yi] After nearly five years of delays, the Trump administration restarted the collection of overdue student loans at the beginning of this month, threatening to take measures such as wage garnishment, cancellation of tax refunds, and federal welfare benefits for those who failed to repay on time.
The Wall Street Journal reported on May 26 that this not only brought personal financial pressure to Americans with overdue student loans but also posed a new challenge to the U.S. economy. These borrowers are now spending more money each month to repay their debts, affecting their consumption in other areas. If they fail to repay, they will be marked as delinquent or in default, leading to a decrease in their credit scores, making it harder for them to borrow money in the future.
Morgan Stanley Bank's economists estimated in May that by 2025, the total monthly expenditure for repaying student loans in the United States would increase by between $1 billion and $3 billion, which could lead to a decline of about 0.1 percentage points in the U.S. GDP this year.
In March 2020, after the outbreak of the pandemic, the first Trump administration suspended repayment of federal student loans and stopped reporting delinquencies to credit agencies. After President Biden took office, he extended the freeze on student loan payments several times until October 2023 when monthly repayments resumed, but the first-year repayment rules were relaxed. In October last year, the Biden administration announced that it would resume reporting delinquent payments by January 2025. In April this year, the Department of Education under the second Trump administration issued a statement announcing that its下属Federal Student Aid (FSA) would restart the collection of overdue student loans starting May 5, marking the first resumption of such actions since March 2020.
The Wall Street Journal pointed out that although borrowers have been required to repay student loans for several months, the move by the Trump administration to restart debt collection has come as a shock to those who have never experienced or have forgotten the collection process.
Meanwhile, the Biden administration's "Savings for Valuable Education" (SAVE) plan - which links borrowers' repayment amounts to income and family size - is facing legal challenges, and repayments for 8 million participants in the program have been put on hold. The newspaper expects that these borrowers may need to start repaying later this year or early next year.
With the end of the "no-consequence" policy, the impact of restarting repayments and collections has begun to show. According to a report by The New York Times in May, the credit scores of borrowers with overdue payments began to drop, with over 5 million borrowers in default, and millions more expected to face difficulties.
The Wall Street Journal reported that the delinquency rate (over 90 days overdue) surged. This month, the Federal Reserve Bank of New York reported that the student loan delinquency rate jumped from 0.7% in the fourth quarter last year to 8% in the first quarter this year, basically matching pre-pause levels.
In the first quarter of 2025, the delinquency rate for U.S. student loans surged. Chart by The Wall Street Journal.
Michael Dinerstein, an economist at Duke University, said any measure to restart repayments could lead to a certain degree of increase in delinquency rates. He hopes that as people receive collection notices, they will take repayment seriously, and that recent repayment plans will eventually bring delinquency rates below pre-pandemic levels. But what worries him is that so many people have been unable to repay for such a long time, making it even harder for them to do so now.
The Federal Reserve Bank of New York stated that among millions of borrowers newly marked as delinquent on student loans, many already had subprime credit ratings, but 2 million had credit scores between 620 and 719, i.e., close to prime credit ratings, and another 400,000 had credit scores above 720, classified as prime credit ratings. The latter two groups saw their credit scores drop recently due to delinquent student loans; the average credit score for borrowers close to prime credit ratings dropped by 140 points, while the average credit score for prime credit-rated borrowers fell by 177 points.
The United States uses a social credit management system based on commercial credit reporting companies to evaluate consumers' creditworthiness, credit status, and credit capacity, assigning credit scores. Different companies provide different ratings based on credit scores, but generally speaking, scores between 300 and 580 are considered the worst credit ratings, scores between 580 and 670 are close to prime segments, and scores around 670 to 850 are high-score segments.
The Wall Street Journal pointed out that a drop in credit scores adds additional constraints to consumer spending; many borrowers who might have qualified for credit cards, car loans, or mortgages last year will no longer be eligible. MSN analysis, part of Microsoft's portal, noted that the decline in individual credit weakens the financing capability of private consumption, which is a significant component of the U.S. economy.
Additionally, for those who have not repaid their student loans for five years, receiving notices to collect overdue payments can disrupt their budget plans, further exacerbating the situation of defaulting on debt.
Constantine Yannelis, an economist at the University of Cambridge, analyzed that borrowers who planned budgets based on the idea of non-repayment face the risk of default, especially those who graduated during the loan suspension period or have no experience of repayment. He believes that the delinquency rate is likely to rise further in the coming months as more borrowers struggle to repay their loans, and their credit ratings continue to deteriorate.
MSN warned that this miscalculation of personal budgets could lead to unintended financial shocks, resulting in an overall rise in delinquency rates. This impact will make those already in vulnerable positions even worse off; students attending two-year colleges, for-profit institutions, or dropouts are most likely to default on repayments and may face situations such as wage garnishment, cancellation of tax refunds, and reduced federal benefits, as measures taken by the Trump administration to recover overdue student loans.
"In the medium term, this could lead to an increase in the number of people living in poverty and greater reliance on social welfare programs," MSN stated.
On a macro level, Morgan Stanley estimates that restarting repayments could cause a 0.1 percentage point decline in the U.S. GDP in 2025. Although the decline seems small, combined with other adverse factors such as high interest rates, persistent inflation, and political budget conflicts, it could have a greater impact.
"There is an optimistic path and a pessimistic path," Dinerstein said. Under the optimistic scenario, borrowers adapt and resume repayments, while under the pessimistic scenario, delinquency rates continue to rise, with consequences spreading throughout the financial system. "I am cautious about predicting which path we will take."
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Original source: https://www.toutiao.com/article/7508950483537740339/
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