The Trump Administration is preparing to launch their plan for collecting defaulted student loan payments starting May 5, leaving many Americans scrambling to adjust their financial plans to pay off the debt.
As announced by the U.S. Department of Education, around five million U.S. borrowers will have their loans sent for collection at the start of next month. An additional four million individuals are in late-stage delinquency, which could result in collections within months.
While all of these loans do eventually need to be repaid, the Trump Administration’s plans could contribute to a further slowing of the economy at a time where the United States is already at an elevated risk of recession.
Under the plan administered by the Trump Administration, the federal government will garnish wages from some of the borrowers, which reduces the amount of money earned, hence reducing economic activity.
If the economy does decline following the implementation of this plan, the lessened economic action will not be a primary factor, such as the recent tariffs, but would still be a compounding factor. “I think it is scary knowing we are already at such a high risk for economic recession, something that would dramatically impact the whole country, and then to heighten the risk we are taking money out of circulation,” senior Kiara Jones said.
In total, there are around 42 million borrowers owing more than $1.6 trillion in student loan debt. When consumer spending accounts for approximately 70% of America’s economic activity, the money that will be taken out of circulation by the federal government in order to pay back these loans adds up rapidly, which could be detrimental to the economy.
Many borrowers may face long term consequences due to these loans as well. When loans go into collections, bureaus are notified, damaging borrowers’ credit score. The damage to these credit scores has the potential to result in future difficulty for individuals to make large purchases such as a home or car, setting up potential issues for the economy in the future. “I think it is crazy to think that going and getting a higher education could potentially cause you financial hardship in the future when the whole point of getting an education is to hopefully enhance your quality of life. I just dont think it quite adds up,” Jones said.
On the contrary, U.S. Secretary of Education Linda McMahon claims this policy may be for the better, “American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies.” She continued, “The Biden Administration misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear,” said McMahon.
While the policy may induce short term pain, it may lead to more certainty for the future for borrowers. “One thing I will say is that at least it will iron out the misunderstandings and questions borrowers may have regarding their payments. Hopefully it will set borrowers up for more certainty in the future,” senior Kaylee Mowen said.
The plan being rolled out by the Trump Administration at an already-elevated time of recession probability may be inconvenient and economically dangerous. Although, if the economy pushes through its potential drought, more certainty will inspire borrowers in the future.
