Student Loan Defaults Threaten 1,100+ Colleges—and Borrowers Suffer

The End of the Student Loan Pause and Its Impact on Higher Education

The period of student loan payment pauses and zero interest accrual, which was a hallmark of the pandemic era, has officially ended. On May 5, 2025, the Office of Federal Student Aid (FSA) resumed collection of its defaulted student loan portfolio. This shift marks a significant change in the landscape of student financial aid and raises concerns about the stability of higher education institutions and borrowers alike.

With this transition comes a growing crisis. According to federal data released in July 2025, over 1,100 colleges and universities are at risk of losing access to federal financial aid due to rising Cohort Default Rates (CDRs). These rates are tied to mass student loan nonpayment, and with approximately 25% of the entire federal student loan portfolio either in default or in a late stage of delinquency, the consequences could be far-reaching.

Key Takeaways

• Financial instability for colleges: Institutions that rely heavily on tuition and federal funding may face serious financial challenges.
• Reputation damage: A high default rate can harm a college's reputation, affecting enrollment and long-term financial health.
• Credit score impact: Borrowers who default on their loans may experience severe damage to their credit scores.
• Wage garnishment: Defaulted loans can lead to wage garnishment, making it harder for borrowers to manage their finances.
• Limited future opportunities: Defaulted loans can restrict access to further education and economic opportunities.
• Need for policy reform: Addressing the issue of loan defaults requires comprehensive policy changes to support both colleges and borrowers.

How Widespread Student Loan Defaults Could Shake Higher Education

Mass student loan defaults have the potential to significantly disrupt the operations of colleges that depend on federal assistance programs. The Cohort Default Rate (CDR) is a key metric used to measure the percentage of a school’s federal student loan borrowers who default within a specific time frame after entering repayment.

Under Section 435 of the Title IV, Higher Education Act of 1965 (HEA), institutions that receive federal funding must maintain low CDRs. If a school’s CDR exceeds 30% for three consecutive years or 40% in a single year, it risks losing eligibility for federal student assistance programs, including federal student loans and Pell Grants.

Federal data from July 2025 revealed that a total of 1,110 institutions could be at risk of losing access to these vital programs. These include 111 private institutions, 148 public non-profit institutions, and 851 proprietary institutions. The schools listed have a student loan nonpayment rate of 30% or more, reflecting borrowers who entered repayment since January 2020 and were more than 90 days delinquent as of mid-May 2025.

What Loan Defaults Mean for Borrowers’ Financial Futures

For current borrowers with loans in default, the consequences can be severe. These include damage to credit scores, which can hinder the ability to purchase a home or a car. Additionally, borrowers may face wage garnishment, where a portion of their income is withheld to pay down the defaulted loan. Tax refunds and federal benefit payments may also be withheld to settle outstanding debt.

If affected colleges are unable to provide federally backed financial aid, students may need to turn to alternative options such as academic-based scholarships or private student loans. However, private loans typically come with higher interest rates and less favorable terms, making them a less attractive option for many students.

The Bottom Line

The end of the pandemic-era student loan pause has exposed the vulnerabilities of institutions with high default rates, putting over 1,100 schools at risk of losing access to federal financial aid. This situation limits options for students seeking to fund their education and creates a higher barrier to entry for those pursuing a college degree.

Without immediate action, future borrowers may find themselves with fewer resources to support their educational goals. At the same time, colleges may struggle with funding issues, reduced enrollment, and difficulty attracting and retaining new students. It is crucial for policymakers, colleges, and borrowers to take proactive steps to address these challenges and prevent further harm to the higher education system.