1.8 Million Student Loan Borrowers Face Wage Garnishment, No Tax Refunds, Lower Credit Score

Defaulting borrowers could see up to 15 percent of their monthly wages get withheld by their employer.

A student studies in the Rice University Library in Houston on Aug. 29, 2022. Brandon Bell/Getty Images

Roughly six million federal student loan borrowers have become newly delinquent, with almost a third at risk of hitting default status next month, which could trigger wage garnishment and other procedures against them, credit reporting agency TransUnion said in a June 24 statement.

There were 5.8 million borrowers with payments being 90 days or more past due as of April, TransUnion said. When payments become 270 days past due, the borrower enters default status. “It is estimated that nearly one-third, approximately 1.8 million, could reach default status in July 2025.”

Once a borrower hits default status, the consequences can be severe.

Their wages may be garnished, according to the Department of Education. “This means your employer may be required to withhold up to 15 percent of your pay and send it to your loan holder to repay your defaulted loan.”

The borrower can lose eligibility for additional federal student aid, become ineligible for assistance under most of the federal benefit programs, see their tax refunds and federal benefit payments being withheld, and be brought to court by the lender, according to the department.

“The default is reported to national consumer reporting agencies, damaging your credit rating and affecting your ability to buy a car or house or to get a credit card,” it said. “It may take years to reestablish a good credit record.”

Moreover, the entire unpaid balance, along with any interest owed, can become “immediately due.”

The Department of Education had ceased collecting federal student loan repayments since March 2020 amid the COVID-19 pandemic. On April 21, the agency announced restarting collections beginning May 5.

Congress had mandated that the collections begin in October 2023. However, the Biden administration “refused to lift the collections pause and kept borrowers in a confusing limbo,” the department said, adding that resuming loan collection prevents taxpayers from having to shoulder the cost of these loans.

According to TransUnion, the 1.8 million borrowers that could hit default status next month may only be the beginning of a significant jump in such cases.

The company is projecting an additional one million of the 5.8 million borrowers to hit default status in August, followed by two million more in September.

“We continue to see more and more federal student loan borrowers being reported as the 90+ days delinquent, making a larger number of consumers vulnerable to entering default and the start of collections activities,” said Michael Raneri, head of U.S. Research and Consulting at TransUnion.

“That said, based on the relatively small increase between March 2025 and April 2025, it is possible that the figures are close to peaking.”

Raneri advised federal student loan borrowers who are at risk of default to contact their lenders and learn about ways to avoid defaulting, which include securing income-driven payment plans and loan rehabilitation programs.

According to the education department, there are 42.7 million student loan borrowers in the country who collectively owe more than $1.6 trillion.

Struggling Graduates

The risk of default among student loan borrowers is occurring while the labor market for recent college graduates has become challenging.

According to data from the Federal Reserve Bank of New York, the unemployment rate of recent college graduates jumped to 5.8 percent in the first quarter of 2025, which is the highest reading since 2021.

Moreover, the underemployment rate “rose sharply” to 41.2 percent, it said.

Underemployment rate is the share of college graduates engaged in a job that typically does not require a college degree.

The bank called the labor market condition for recent college graduates as having “deteriorated noticeably” in Q1.

Part of the problem is that hiring is slowing down. Earlier this month, the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants published a survey that revealed that only 14 percent of business executives planned on hiring new employees immediately.

“We’re seeing a lot of revised expectations: delayed hiring and investment, pared-back expansion plans, lowered key performance indicators,” said Tom Hood, executive vice president of business engagement and growth at the AICPA.

“The data shows a clear pivot from optimism to caution. Businesses are bracing for volatility, and the uncertainty around tariffs is amplifying that shift.”

Meanwhile, a survey by online employment marketplace ZipRecruiter revealed that many graduates found their search for jobs took longer than expected, with salaries also not meeting expectations, according to an April 23 statement from the company.

“Navigating the transition from campus to career can be a challenge for new grads, especially given the unpredictable market this class is stepping into,” said ZipRecruiter CEO Ian Siegel.

“The grads who will come out ahead are those who start their search early, stay open to different paths, and keep at it, even if things don’t go exactly as planned.”