As of Monday, the U.S. Department of Education is restarting “involuntary collections” on federal student loans that are in default, which may seriously damage the credit scores of millions of borrowers.

Student loan collections efforts have largely been on pause since the pandemic began in March 2020. A new analysis by TransUnion found that consumers who faced default in recent months have seen their credit scores fall by 63 points, on average. For super prime borrowers — or those with credit scores above 780 — who were seriously delinquent, scores sank as much as 175 points. Credit scores typically range between 300 and 850.

“Consumers may find themselves shocked by the dramatic and immediate impact that a default can have on their credit scores,” Joshua Trumbull, senior vice president and head of consumer lending at TransUnion, said in a statement.

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The credit score implications worsen for borrowers with better scores, research shows. “The bigger they are, the harder they fall,” said Ted Rossman, senior industry analyst at Bankrate.

Because borrowers in less risky credit tiers typically have fewer dings on their credit, any derogatory mark “has the potential to have a significant and jarring impact,” according to TransUnion. In general, the higher your credit score, the better off you are when it comes to getting a loan. 

“Somebody with excellent credit could see a drop of 100 points or more — that’s massive,” Rossman said. “That’s going to make it hard to even get credit and if you do, you will face a sharply higher interest rates on everything from mortgages to car loans.”

As collection activity resumes, the federal government can seize some or all of certain federal payments including tax refunds and Social Security benefits as well as withhold a portion of borrowers’ paychecks.

“Borrowers who don’t make payments on time will see their credit scores go down, and in some cases their wages automatically garnished,” U.S. Secretary of Education Linda McMahon wrote in a Wall Street Journal op-ed last month.

The Federal Reserve Bank of New York cautioned in a March report that student loan borrowers who are late on their payments could see their credit scores sink by as much as 171 points. 

Initially, those borrowers benefitted from the pandemic-era forbearance on federal student loans, which marked all delinquent loans as current. Median credit scores for student loan borrowers rose by 11 points between the end of 2019 to the end of 2020, the Fed researchers found. However, that relief period officially ended on Sept. 30, 2024.

“We expect to see more than nine million student loan borrowers face substantial declines in credit standing over the first quarter of 2025,” the Fed researchers wrote in a blog post.

“Although some of these borrowers may be able to cure their delinquencies,” the Fed researchers said, “the damage to their credit standing will have already been done and will remain on their credit reports for seven years.”

Lower credit scores could result in reduced credit limits, higher interest rates for new loans and overall lower credit access, the researchers also said.

Both VantageScore and FICO reported a drop in average scores starting in February as early- and late-stage credit delinquencies rose sharply, driven by the resumption of student loan reporting. Borrowers who are late on their payments could see their credit scores tank by as much as 129 points, VantageScore reported at the time.

Currently, around 42 million Americans hold federal student loans and roughly 5.3 million borrowers are in default, according to the Education Department. Another 4 million borrowers are in “late-stage delinquency,” or over 90 days past due on payments.

One in five student loan borrowers were reported as being over 90 days past due by the end of February, the data from TransUnion showed.

“It’s surprising how many people who should be paying have been reported as not paying,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion, and those “delinquencies will likely tick higher.”

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Just weeks after announcing a 100% withholding rate on new overpayments of benefits, the Social Security has slashed the rate down to 50% for certain beneficiaries.

Yet that clawback on monthly benefit checks may still cause a financial burden for individuals who are affected, experts say.

For new overpayment notices sent on or after April 25, the 50% default withholding rate will apply to so-called Title II benefits, which include retirement, survivors and disability insurance, according to an emergency message released by the Social Security Administration.

The withholding rate for Supplemental Security Income benefits remains 10%.

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“Obviously, it’s better not to lose all of your income,” said Kate Lang, director of federal income security at Justice in Aging, a national organization focused on fighting senior poverty.

“But if you’re relying on your benefits to pay your rent or your mortgage and buy food, losing half of that income is going to be devastating and can still result in people becoming homeless,” Lang said.

The Social Security Administration had previously announced that it would increase the default withholding rate for overpayments to 100%. Under President Joe Biden’s administration, the default withholding rate had been dropped to 10% of a beneficiary’s monthly benefit or $10 — whichever was greater. Generally, the rate beneficiaries are subject to is based on the terms at the time they were notified.

“In the last 100 days, we’ve gone from as low as 10 [percent] to 100 and now to 50,” said Richard Fiesta, executive director of the Alliance for Retired Americans.

The 100% withholding rate was “ridiculously draconian and cruel,” Fiesta said. The Social Security Administration had said the change to that full recovery rate would generate about $7 billion in program savings in the next decade, based on estimates from the chief actuary.

Yet even with the default withholding rate cut in half, beneficiaries may still struggle financially.

“Losing 50% [of benefits] for a lot of people could put them into immediate economic hardship,” Fiesta said.

In most cases, it wasn’t the beneficiary’s fault that they were overpaid, Fiesta said. “They shouldn’t be put in a worse situation because of something they never caused in the first place,” he said.

Millions of borrowers who signed up for the Biden administration’s new repayment plan, known as SAVE, were caught in limbo after GOP-led lawsuits managed to get the plan blocked in the summer of last year. Many of those borrowers will now have to switch out of a Biden-era payment pause and into another repayment plan that will spike their monthly bill.

In recent months, the Trump administration has eliminated the forgiveness provision from some student loan repayment plans.

It also terminated staff at the Education Department, including many of the people who helped assist borrowers. Now some student loan borrowers report waiting hours on the phone before being able to reach someone about their debt. (The Trump administration has told defaulted borrowers to contact the department for options on getting current.)

“The timing of the layoffs is unfortunate, given the need for borrowers to get help,” said higher education expert Mark Kantrowitz, who added that he’s heard from people stuck waiting on hold as long as eight hours to speak with someone at the department or their loan servicer.

In addition to garnished paychecks and benefits, the millions of borrowers who are already late on their payments may see their credit scores tank by as much as 129 points as the Education Department ramps up collection activity, VantageScore recently wrote.

Meanwhile, the Federal Reserve predicted in March that some people with a delinquency could see their scores fall by as much as 171 points. Credit scores typically range from 300 to 850, with around 670 and higher considered good.

Lower credit scores can lead to higher borrowing costs on consumer loans such as mortgages, car loans and credit cards.

“We’ve been seeing clients with delinquent accounts who reached out after noticing a drop in their credit scores,” said Carolina Rodriguez, director of the Education Debt Consumer Assistance Program in New York.

She said one client hasn’t made a payment on her student debt since last year because she can’t afford her $200 monthly bill.

“She’s making $45,000 and living in New York City,” Rodriguez said. “Every month, she’s in the red.”