As President Donald Trump’s trade war heats up, economists are warning that the chances of the United States entering a recession are increasing. And if a recession happens while the federal student loan system remains mired in turmoil and relief options are eliminated, it could have major implications for borrowers.
During economic downturns and periods of financial hardship, federal student loan borrowers traditionally have had a broad array of options to postpone or reduce their monthly payments. This would allow them to keep their student loans in good standing and continue progressing toward eventual payoff or student loan forgiveness. These options also help borrowers avoid defaulting on their student loans, which can have major long-term repercussions.
But legal challenges, and recent actions by the Trump administration (including cutting off access to affordable repayment plans), are preventing many student loan borrowers from accessing these options. At the same time, Republican lawmakers in Congress are considering significant changes to federal student loan forgiveness and repayment programs. If a recession hits amid these disruptions, millions of federal student loan borrowers could face dire consequences.
Affordable Payment Plans And Student Loan Forgiveness Remain Blocked
Income-driven repayment plans are crucial tools for student loan borrowers during economic downturns. These are long-term repayment plans that allow borrowers to repay their student loans using a formula based on their income and family size, with any remaining balance forgiven at the end of the term (typically 20 or 25 years). Borrowers who are enrolled in traditional Standard or Extended repayment plans who find that they no longer can afford their payments have the option to enroll in an IDR plan. And borrowers already enrolled can request a recalculation of their monthly payments at any time due to a change in their financial circumstances.
But those options are largely unavailable right now after the Department of Education effectively suspended the entire IDR system last month by removing the applications for IDR plans and halting all processing. The department indicated this was necessary in order to update the IDR forms following a new ruling by a federal appeals court involving the SAVE plan, one of several different IDR programs.
The American Federation of Teachers filed a lawsuit last month, arguing that the Trump administration’s actions blocking IDR plans are unlawful. Shortly after the lawsuit was filed, the Department of Education restored access to the IDR application. But processing remains stalled, and most observers anticipate significant processing delays and backlogs, even if the IDR system becomes fully operational again soon. This means that borrowers who need to enroll in an IDR plan or must request a recalculation of their payment due to a reduction in income (such as after losing their job) will still be unable to do so for quite some time.
Meanwhile, Congress is considering making significant changes to income-driven repayment programs through legislation. This may include a full repeal of all existing IDR plans and the elimination of student loan forgiveness at the end of the repayment term, as well as narrowing eligibility for other programs like Public Service Loan Forgiveness, or PSLF. Advocacy groups have warned of catastrophic consequences for borrowers if this happens, including higher payments, a spike in default rates, and in some cases, a lifetime of debt.
Deferment and Forbearance Have Significant Downsides For Student Loan Borrowers
Student loan borrowers who cannot afford their payments and cannot immediately enroll in an IDR plan may have no choice but to request a deferment or forbearance. These are programs that postpone repayment while keeping the borrower’s student loan in good standing.
There are several potential options for borrowers, depending on their circumstances. An unemployment deferment is available for borrowers who recently lost their job or are receiving unemployment benefits. An economic hardship deferment is available for those who are receiving means-tested public benefits like Temporary Assistance for Needy Families, or work full-time but have a monthly income that isn’t more than the minimum wage rate or 150% of the poverty guideline for their family size. And a general forbearance is available for borrowers who are experiencing a financial hardship.
But while deferment and forbearances allow student loan borrowers to postpone their payments, they are not necessarily ideal. Interest will accrue during most deferment and forbearance periods, increasing the loan balance over time. And with the exception of an economic hardship deferment, the period typically doesn’t count toward student loan forgiveness.
“In most cases, interest will accrue during your period of deferment or forbearance,” says Department of Education guidance. “This means your balance will increase and you’ll pay more over the life of your loan. If you’re pursuing loan forgiveness, any period of deferment or forbearance may not count toward your forgiveness requirements. This means you’ll stop making progress toward forgiveness until you resume repayment.”
Borrowers also have limited amounts of deferment and forbearance options available – typically no more than three years for each type of relief. Those who have already used up their existing reserves of deferment and forbearance options, such as during the last recession associated with the Covid-19 pandemic in 2020, may have no viable ways to postpone repayment during another recession.
Defaulting On Federal Student Loan Debt Can Have Serious Consequences
Borrowers who aren’t able to make their student loan payments during a recession and run out of deferment and forbearance options may default on their loans. Federal student loan default, which occurs after 270 days of missed payments, is very serious and can lead to massive financial penalties, lasting credit damage, and involuntary collections actions such as wage garnishment, tax refund seizures, and offsets of federal benefits, including Social Security benefits. The Department of Education and federal student loan guaranty agencies can pursue these avenues without needing to go to court, although they can also sue student loan borrowers to pursue other avenues of collection, such as property liens.
“Defaulting on a student loan can lead to serious legal and financial consequences,” says the Department of Education on its website. In addition to involuntary collections, the department warns that defaulting on a federal student loan can lead to the denial of additional federal student aid, and ineligibility for certain federal student loan forgiveness programs. Credit damage associated with the default can interfere with renting an apartment or purchasing a new home or a car. The department also warns that defaulting on federal student loans can lead to academic transcript withholding.
The federal student loan default system has been largely dormant since 2020 due to a series of Covid-19-era relief measures. But that relief expired this year, and the federal student loan collections machine is turning back on again, with wage garnishments and other involuntary collections methods expected to ramp up this fall. In the meantime, federal student loan delinquency rates are already climbing, with more than nine million borrowers expected to incur credit damage this year for missing their student loan payments.