Effective May 5th, 2025, the Education Department will start “involuntary” repayment of federal student loans that are in default. The U.S. Secretary of Education recently stated that borrowers who don’t make payments on time will see their credit scores go down, and in some cases, their wages will be automatically garnished.
Student Loans & the Covid-19 Pandemic
During the COVID-19 pandemic, Congress enacted the CARES Act on March 27, 2020, which automatically placed most federal student loans into forbearance and set the interest rate to 0 percent, meaning borrowers neither made payments nor saw unpaid interest capitalize on their balances; moreover, loans were reported to credit bureaus as if on‐time payments were being made, protecting credit scores during the suspension.
Both the Trump and Biden administrations extended this “payment pause” multiple times, ultimately keeping it in effect through September 1, 2023, after which interest began accruing again and borrowers were required to resume payments starting in October 2023, ending an unprecedented relief period for over 40 million Americans.
In addition to paused payments, collection efforts on defaulted student loans have been mostly paused since March 2020. Beginning May 5th, the department will begin involuntary collection through the Treasury Department’s offset program, which withholds payments from the government, including tax refunds, federal salaries, and other benefits. Wages could also be garnished following a 30-day warning.
Student Loans and Credit Scores
The CARES Act treated paused federal student loans as if on-time payments were being made, preventing credit score drops. This change helped boost borrowers’ scores: the New York Fed found the median score for student-loan holders rose 11 points from late 2019 to late 2020, with previously delinquent accounts seeing even larger gains. Industry analysts also report an average 9-point lift for borrowers simply from having deferred payments reported on time. The Consumer Financial Protection Bureau noted an overall upward shift in credit score distributions nationwide thanks to these relief measures.
Federal student loan payments officially resumed in October 2023, but a Department of Education “on-ramp” excused missed payments from negative reporting until October 1, 2024, at which point delinquencies and late payments once again affected consumers’ credit reports. By February 2025, the national average FICO score had dipped to 715—a one-point monthly and two-point annual decline—largely attributable to the influx of student loan delinquencies being reported for the first time since early 2020, with approximately 2.7 million accounts showing delinquency as borrowers recommenced repayment obligations.
Now, in addition to loans coming current, collection efforts on defaulted loans will resume starting May 5th.
How Will These Changes Affect Borrowers Getting a Mortgage
It is estimated that more than nine million student loan borrowers will face significant drops in credit score once delinquencies appear on credit reports in the first half of 2025.
When evaluating a mortgage application, lenders currently either use the student loan payment that is reflected on the credit bureau, or if there is no payment listed, they use a percentage of the balance owed to calculate a payment. That, plus other outstanding debts, are factored into your Debt-to-Income Ratio to determine how much new debt you can take on. Read more about how student loans affect your mortgage dreams here.
When student loan payments are 90 days late, loans are reported as delinquent—dropping FICO scores by roughly 50–100 points—and after 270 days they enter default, which in turn triggers a flag in the government’s CAIVRS database that bars borrowers from FHA, VA, and USDA mortgages until the default is resolved through rehabilitation or consolidation requiring nine to twelve months of on-time payments.
Even for Conventional loans, these derogatory marks raise your debt-to-income ratio and depress your credit score, often pushing you below the 620–640 range that many lenders require, resulting in higher interest rates, larger down payments, or outright application denials. Moreover, collection accounts stemming from defaulted student loans can remain on your credit report for up to seven years, continuously undermining your creditworthiness and complicating efforts to secure competitive mortgage terms.
Options for Student Loan Repayment
Borrowers now have several relief pathways under recently revamped income-driven repayment (IDR) systems. As of late March 2025, the Department of Education reopened applications for revised IDR plans (IBR, PAYE, REPAYE), streamlining enrollment with a new process that waives annual income recertification and places applicants in administrative forbearance while their paperwork is processed. Although the Biden-era SAVE plan remains paused by a court injunction—with existing enrollees kept in an interest-free forbearance until it’s restored—borrowers can still switch into other IDR options to cap payments at a percentage of discretionary income or temporarily pause payments via economic-hardship deferment or forbearance (noting that interest may accrue on unsubsidized loans).
Enabling automatic payments through your loan servicer not only helps prevent missed transactions but also earns a 0.25 percent interest-rate reduction on Direct Loans. Finally, borrowers already in late-stage delinquency or default should contact the Department’s Default Resolution Group by May 5, 2025, to explore options like rehabilitation, consolidation, or alternative repayment plans before involuntary collections resume.
Having student loan debt doesn’t automatically disqualify you from buying a home—mortgage lenders evaluate your overall debt-to-income ratio, credit history, and payment reliability rather than singling out student loans. With a steady income and on-time payments, many borrowers carrying education debt still qualify for Conventional, FHA, VA, and USDA loans. Plus, targeted state programs can ease the burden. For example, Illinois’s IHDA SmartBuy program, when open, offered eligible buyers up to $40,000 toward paying off student loans and an additional $5,000 for down-payment or closing-cost assistance to help make homeownership more attainable.
Reach out to our Homestead Financial Mortgage loan advisors for details on how you can achieve your dream home. It is best to start planning early and allow one of our mortgage professionals to do a soft credit pull to see where your credit stands, how we can help improve it, and provide guidance on how to achieve homeownership with student loan debt.