Shomik Sen Bhattacharjee
3 min read
Sen. Elizabeth Warren (D-Mass.) warned Tuesday that millions of borrowers face "a financial scarlet letter" as the Trump administration ends a five-year pause and restarts collections on defaulted federal student loans.
What Happened: The policy, announced May 5, allows the Education Department to seize wages, intercept tax refunds and eventually garnish Social Security checks, putting home purchases and job prospects at risk, Warren wrote in a blog post released ahead of a meeting with Education Secretary Linda McMahon.
The New York Federal Reserve says 8.04% of education-loan balances slipped into serious delinquency in the first quarter, projecting a surge in defaults this summer. Roughly 2.2 million borrowers have already seen credit scores plunge more than 100 points since negative reporting resumed last fall.
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“A damaged credit score is a financial scarlet letter that can follow consumers for years,” warns Warren.
She goes on to explain that borrowers with damaged credit often shell out thousands more in interest on car loans, if lenders approve them at all. Banks may then deny their mortgage applications, pushing them into pricey rentals that build no equity. Utility companies, cell-phone carriers, and landlords also demand hefty security deposits that customers with solid credit skip.
“Nearly half of all employers now run credit checks, meaning damaged credit can cost someone a job opportunity,” she says.
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Why It Matters: McMahon defended the crackdown, saying collections restore accountability and protect taxpayers. While her department temporarily paused Social Security offsets, it plans to resume them later this summer alongside administrative wage garnishment.
Warren also blasted a House-passed spending bill in her blog, stating that it would collapse the existing patchwork of income-driven repayment plans into two options with less-generous terms, potentially lengthening repayment periods and raising monthly bills.
