Are student loan defaults a concern for the economy?

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Over 42 million Americans owe more than $1.6 trillion in student debt, yet only 38% are actively repaying their loans, according to the US Department of Education. The remaining borrowers are in default, delinquency, forbearance, deferment, or grace periods. On the other hand, serious delinquencies, defined as being 90 or more days late, rose to nearly 13% in the second quarter of 2025, the highest level since data collection began in 2004, as shown in the chart below. If this trend continues, nearly a quarter of the federal student loan portfolio could fall into default. Currently, 5.5 million borrowers are already in late delinquency, and that number is expected to grow in the coming quarters.

From an economic standpoint, the immediate impact of missed student loan payments is limited. Since repayments were paused for several years, the government has not been relying on these funds for spending. However, the continued lack of repayment contributes, albeit not meaningfully, to a growing federal deficit, forcing the government to seek alternative fiscal resources. Despite the resumption of payments, the effect on consumer spending is expected to be relatively small. Most borrowers pay around

$200 per month, and if we exclude the 5.5 million borrowers already in default among the 26 million who need to restart payments, about 20 million are expected to restart payments. This would amount to roughly $50 billion in annual payments that could reduce spending in other categories, especially discretionary categories of spending, but only representing a small fraction of the $30 trillion US economy.

Still, the situation is not without consequences. For the 5.5 million borrowers in late delinquency, failure to repay will significantly damage credit scores, reducing access to credit and limiting purchasing power. Discussions around wage garnishment could further reduce disposable income, creating additional headwinds for consumer spending. While credit scores improved during the loan repayment freeze that began in 2020, they are now declining, especially among prime borrowers. Lower credit scores typically lead to smaller credit lines and reduced spending capacity. Although the direct economic impact of student loan defaults may be limited in the short term, the long-term effects, such as weakened credit profiles and reduced consumer activity, could modestly slow overall economic growth.

Source: New York Fed Consumer Credit Panel/Equifax, Liberty Street Economics.
Notes: The table above shows the average change in credit score for borrowers the quarter after they experienced a new delinquency of 90 or more days past due. We limit the sample to borrowers who experienced such an event between 2016:Q1 and 2019:Q4 and isolate to only borrowers’ first such event. Liberty Street Economics then computed the average change in credit score separately by credit score bands in the quarter before the delinquency first appeared on the credit report. Credit scores are Equifax Risk Score 3.0.

This represents just one of several headwinds facing the US economy, alongside potentially higher prices from new tariffs and signs of a softening labor market. Still, these developments support our view that the economy is slowing, not contracting. The foundational elements of US economic resilience, such as consumer strength (especially upper-income households), corporate balance sheets, and labor participation, remain intact. We also anticipate that the Federal Reserve will start lowering rates, which should help offset some of the negative effects of declining credit scores, particularly among lower-income households, by easing borrowing costs and supporting access to credit.

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