Key Takeaways:
- The Department of Education has paused plans to garnish wages and other income of student loan borrowers in default.
- The pause will allow the department to implement major student loan repayment reforms, including simplifying repayment options and providing an additional opportunity for borrowers to rehabilitate their federal student loans.
- Defaults will still be reported to credit agencies, which may adversely impact borrower credit reports.
- Over 4 million Americans are technically in default on their student loans, and almost 10 million borrowers could be in default when reported to credit bureaus.
- The pause has received mixed reactions, with some advocates welcoming the move and others criticizing it as a loss for the country and its budget.
Introduction to the Pause on Wage Garnishments
The Department of Education has announced a temporary halt on plans to garnish wages and other income of student loan borrowers who are in default. This pause will allow the department to implement significant improvements to the student loan system, including simplifying repayment options and providing an additional opportunity for borrowers to rehabilitate their federal student loans. The department had initially planned to begin wage garnishments the week of January 7, but the pause will give financially strained borrowers time to resolve their defaulted loans with their federal loan servicer.
Impact on Credit Scores
Although borrowers will be able to hold on to their income for the time being, the department has warned that defaults will still be reported to credit agencies. This may have a negative impact on borrower credit reports, which can have lasting effects. Lenders use credit scores to decide whether to approve loans and credit cards, as well as to determine interest rates and credit limits. A lower credit score can make it difficult for individuals to obtain credit or loans, and can also lead to higher interest rates and fees. According to Michele Raneri, vice president and head of U.S. research and consulting at TransUnion, a lower credit score can be particularly problematic when trying to obtain a mortgage.
The Scope of the Default Crisis
The number of Americans in default on their student loans is staggering. According to the Department of Education, over 4 million Americans were technically in default, or at least 270 days overdue, on their student loans as of the end of 2025. This number is expected to rise to almost 10 million borrowers, or almost 25% of the federal student loan portfolio, when defaults are finally reported to credit bureaus. This would be a record number of defaults, and experts are warning of an unprecedented default crisis. The default crisis is three times worse than it was prior to the pandemic, with a borrower defaulting on a loan every nine seconds.
Reactions to the Pause
The pause on wage garnishments has received mixed reactions from advocates and analysts. Aissa Canchola BanĚez, policy director at Protect Borrowers, has welcomed the move, stating that it is a win for struggling borrowers. However, some advocates, such as Natalia Abrams, Student Debt Crisis Center president & founder, believe that the administration needs to go further and offer comprehensive student loan debt relief. On the other hand, some analysts, such as Maya MacGuineas, president of the nonprofit Committee for a Responsible Federal Budget (CRFB), have criticized the halt as a loss for the country and its budget. MacGuineas estimates that the U.S. could lose up to $5 billion per year in collection and lead loan balances to balloon.
The Need for Comprehensive Reform
The pause on wage garnishments is a temporary solution to a much larger problem. The student loan system is in need of comprehensive reform, including simplifying repayment options and providing additional opportunities for borrowers to rehabilitate their federal student loans. The administration must also consider the long-term effects of defaults on credit scores and the overall economy. By implementing significant improvements to the student loan system, the administration can help to reduce the number of defaults and provide relief to struggling borrowers. Ultimately, the goal should be to create a fair and sustainable student loan system that allows borrowers to repay their loans without undue hardship.
