Student loan defaults hit record high. Borrowers need to act ASAP

Student loan borrowers are in trouble, data show.

A record number of loans are in default, according to an Associated Press analysis this week. Defaults have grown by about 4.2 million to an all-time high of 9.52 million since June 2025, when borrowers were allowed again to default on loans, according to data from the Office of Federal Student Aid. During the pandemic, the government paused student loan payments and prevented loans from entering default.

If borrowers don't act quickly, the defaults could haunt them for years, experts said.

"A federal student loan default can result in wage garnishment, tax refund garnishment, and have negative impact on credit for years to come," said Stacey MacPhetres, senior director of education finance at Bright Horizons, provider of educational advisory services to organizations and families.

The Trump administration has delayed refund and wage garnishment, but they're expected to return.

What should student loan borrowers do?

Borrowers in default need to either make repayments or enter rehabilitation, MacPhetres said. The first step is to open your mail. Do not ignore any notices regarding student loans, she said.

"They should respond to any correspondence they have from loan servicers, collections agencies or the Department of Education to begin the process," she said.

When you respond, explain your situation fully and discuss your options, the Department of Education's Federal Student Aid site said. "If you make repayment arrangements soon enough after your loan has gone into default, you may be able to resolve the default quickly," it said.

Options include paying off the student loans in full, which likely isn't a choice for most. Other options are rehabilitating or consolidating the loans.

Loan rehabilitation takes several months to complete, but you can quickly apply for loan consolidation, FSA said.

However, if you consolidate a defaulted loan, the record of the default as well as late payments reported before the loan went into default will remain in your credit history for seven years from when they were first reported. That contrasts with rehabilitation.

There also are other differences between the two programs, and borrowers should check the FSA site and speak to their loan servicers to understand them before making a decision.

What will happen to borrowers in default?

Credit scores will drop. "Payment history is the single biggest factor in a FICO Score, so for anyone behind on student loans, that is the first thing to address," said Tommy Lee, senior director at credit scoring company FICO.

The national average FICO Score fell to 714 in October last year from 716 in January 2025, partly because of record student loan delinquencies, he said. Credit scores are important because lenders use them to decide whether to approve loans and credit cards and to determine interest rates and credit limits.

"What happens going forward will depend on how quickly those with student loan delinquencies are able to get back on track with their payments, and to avoid as much as possible those missed payments spreading to other credit obligations," Lee said.

For those whose credit scores have fallen, "the good news is that a low score today is not permanent," Lee said. "FICO Scores are designed to reflect recent behavior, so getting current on missed payments and then staying current is the most direct path to recovery."

For borrowers who are struggling but haven't seen a credit score decline yet, "contact a loan servicer before missing a payment, not after," he said. "Deferment and income-driven repayment options can help protect a score before any damage occurs.”

New student loan rules

Earlier in July, federal student loans saw the most sweeping overhaul in decades.

Changes included new borrowers facing loan caps, elimination of Grad PLUS loans, and only two repayment options. Many old borrowers had to consolidate loans, choose new repayment plans or risk being involuntarily placed in one that may not fit their budget, loan experts said.

Some borrowers who fell into default may have been confused about all the student loan changes the past couple of years.

"We hear often from borrowers ... that they have been confused about what they needed to do to resume repayment after the CARES ACT payment pauses, loan servicer changes and many legal challenges facing federal student loans," MacPhetres said. "Many borrowers did not realize they were not still in a SAVE (Saving on a Valuable Education), administrative or other forbearance while student loan challenges were being resolved."

Rising costs and economic pressures caused other borrowers to prioritize other expenses while still more may have had unaffordable monthly payments, she said.

But instead of not paying, borrowers need to take the time to look at the new plans and payment options.

"The changes to federal student loan repayment that took effect on July 1 are meant to simplify the repayment process by reducing the number of repayment plans over time which should reduce borrower confusion," MacPhetres said. "The administration has also offered borrowers in repayment a 1% interest rate reduction for direct debit – hoping to encourage borrowers to enter repayment and with an automatic debit which will ensure timely repayment."

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.