By Justin Lahart

Millions of Americans had their student-loan payments put on pause during the pandemic. Now they are back on the hook again.

For borrowers, this means that every month, money that they presumably used to spend elsewhere is going to pay off debt instead. Many who aren't paying are now considered delinquent or defaulted, a status that sinks credit scores. Around 5.6 million borrowers were marked newly delinquent on their student loans in the first three months of this year.

That will strain personal finances. At the same time, it creates fresh challenges for the broader economy.

Borrowers have been required to repay their student loans for some months now. But just this month, the Trump administration began putting millions of defaulted student-loan borrowers into collections, and threatened to confiscate their wages, tax refunds and federal benefits. The collections process was standard before the pandemic. But it is still likely to be a shock to those who haven't experienced it before, or who forgot what it was like.

Economists at Morgan Stanley estimated this month that payments this year will rise by a collective $1 billion to $3 billion a month. That could trim 2025 gross domestic product by about 0.1 percentage point, they said.

The Morgan Stanley economists also note that there are about eight million borrowers in the Saving on a Valuable Education plan, or SAVE -- a Biden-era plan that allows borrowers to pay based on their income but was challenged in courts. Those borrowers will likely need to begin payments late this year or early next.

The government's pause on federal student loans and interest accrual ended back in the fall of 2023. But it was only last fall that missed payments could be reported to the credit-rating companies -- a fact that many borrowers probably found out the hard way when they noticed a big drop in their credit scores this year.

With the end of that no-consequences on-ramp, there has been a surge in delinquencies, as measured by loans that are more than 90 days past due. This month, the Federal Reserve Bank of New York reported that the student loan delinquency rate jumped from 0.7% in the fourth quarter to 8% in the first quarter, back to around where it was before the pandemic.

Any restart of payments was likely going to entail some sort of jump in delinquencies, said Duke University economist Michael Dinerstein. His hope is that as people get hit by delinquency notices, they will get serious about paying, and that the introduction of payment plans in recent years could end up putting the delinquency rate on a lower trajectory than before the pandemic. His worry is that so many people went so long without paying that they will have a hard time paying now.

"There's both an optimistic and a pessimistic path," Dinerstein said. "I'm cautious about predicting which one we're on."

Many of the millions of borrowers marked newly delinquent on their student loans already had subprime credit ratings, according to the New York Fed. But two million had credit scores from 620 to 719, or near prime by the New York Fed's definition. An additional 400,000 were marked as prime, with scores over 720. The average credit score of the near-prime borrowers fell by 140 points, and for the prime borrowers it fell 177 points.

The drop in credit scores could put additional constraints on spending, since many borrowers who last year might have qualified for a credit card, auto loan or mortgage won't be able to qualify anymore.

Moreover, some of them might have been surprised by this. During the pandemic, two major servicers ended their contracts to collect student debt.

"Just imagine you have these people who haven't been making payments for half a decade, they're suddenly getting a letter from a company they've never heard of, saying: 'You owe us student loan payments,' " said University of Cambridge economist Constantine Yannelis.

Yannelis also worries that, as a result of former President Joe Biden's attempts to forgive swaths of student debt, many borrowers didn't really expect they would need to start paying again and built their budgets around that belief. At particular risk might be those borrowers who graduated when the loan pause was in effect, and who don't have experience with loan repayments.

He is also concerned that the delinquency rate might be destined to go up more in the months ahead, with more borrowers struggling to make payments and their credit ratings continuing to deteriorate.

People who attended two-year or for-profit schools, or who quit before getting their degree, are at a heightened risk of falling behind. (And there is plenty of overlap between those two groups.)

Those who fall behind also tend to be poorer: 45% of student-loan borrowers in Mississippi were delinquent in the first quarter, more than any other state, according to the New York Fed. Mississippi also has an especially high rate of people living below the poverty line.

Lesley Turner, an economist at the University of Chicago Harris School of Public Policy, said that the people who get into trouble with their student-loan payments often are those who can least afford it.

It isn't, as the stereotypes might go, "22-year-olds who went to Ivy League schools and live in coastal areas," Turner said.

Write to Justin Lahart at Justin.Lahart@wsj.com

(END) Dow Jones Newswires

May 26, 2025 05:30 ET (09:30 GMT)

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