Wall Street is warning that the U.S. Department of Education’s crack down on student loan repayments may take billions of dollars out of consumers’ pockets and hit low income Americans particularly hard.

The department has restarted collections on defaulted student loans under President Donald Trump this month. For first time in around five years, borrowers who haven’t kept up with their bills could see their wages taken or face other punishments.

Using a range of interest rates and lengths of repayment plans, JPMorgan estimated that disposable personal income could be collectively cut by between $3.1 billion and $8.5 billion every month due to collections, according to Murat Tasci, senior U.S. economist at the bank and a Cleveland Federal Reserve alum.

If that all surfaced in one quarter, collections on defaulted and seriously delinquent loans alone would slash between 0.7% and 1.8% from disposable personal income year-over-year, he said.

This policy change may strain consumers who are already stressed out by Trump’s tariff plan and high prices from years of runaway inflation. These factors can help explain why closely followed consumer sentiment data compiled by the University of Michigan has been hitting some of its lowest levels in its seven-decade history in the past two months.

“You have a number of these pressure points rising,” said Jeffrey Roach, chief economist at LPL Financial. “Perhaps in aggregate, it’s enough to quash some of these spending numbers.”

Bank of America said this push to collect could particularly weigh on groups that are on more precarious financial footing. “We believe resumption of student loan payments will have knock-on effects on broader consumer finances, most especially for the subprime consumer segment,” Bank of America analyst Mihir Bhatia wrote to clients.

To be sure, delinquency is not the same thing as default. Delinquency refers to any loan with a past-due payment, while defaulting is more specific and tied to not making a delayed payment with a period of time set by the provider. The latter is considered more serious and carries consequences such as wage garnishment. If seriously delinquent borrowers also defaulted, JPMorgan projected that almost 25% of all student loans would be in the latter category.

JPMorgan’s Tasci pointed out that not all borrowers have wages or Social Security earnings to take, which can mitigate the firm’s total estimates. Some borrowers may resume payments with collections beginning, though Tasci noted that would likely also eat into discretionary spending.

Trump’s promise to reduce taxes on overtime and tips, if successful, could also help erase some effects of wage garnishment on poorer Americans.

Still, the expected hit to discretionary income is worrisome as Wall Street wonders if the economy can skirt a recession. Much hope has been placed on the ability of consumers to keep spending even if higher tariffs push product prices higher or if the labor market weakens.

LPL’s Roach sees this as less of an issue. He said the postpandemic economy has largely been propped up by high-income earners, who have done the bulk of the spending. This means the tide-change for student loan holders may not hurt the macroeconomic picture too much, he said.

“It’s hard to say if there’s a consensus view on this yet,” Roach said. “But I would say the student loan story is not as important as perhaps some of the other stories, just because those who hold student loans are not necessarily the drivers of the overall economy.”

U.S. consumers are becoming increasingly worried that tariffs will lead to higher inflation, according to a University of Michigan survey released Friday.

The index of consumer sentiment dropped to 50.8, down from 52.2 in April, in the preliminary reading for May. That is the second-lowest reading on record, behind June 2022.

The outlook for price changes also moved in the wrong direction. Year-ahead inflation expectations rose to 7.3% from 6.5% last month, while long-term inflation expectations ticked up to 4.6% from 4.4%.

However, the majority of the survey was completed before the U.S. and China announced a 90-day pause on most tariffs between the two countries. The trade situation appears to be a key factor weighing on consumer sentiment.

“Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers’ thinking about the economy,” Surveys of Consumers director Joanne Hsu said in the release.

Inflation expectations are closely watched by investors and policymakers. Federal Reserve Chair Jerome Powell has said the central bank wants to make sure long-term inflation expectations do not rise because of tariffs before resuming rate cuts.

A final consumer sentiment index for the month is slated to be released on May 30, and will likely be closely watched to see if the tariff pause led to an improvement in sentiment.

This is breaking news. Please refresh for updates.