Regulatory Changes in Medical and Student Debt Impacts Millions

Founder at The People's Economist | MBA, Top Ranked Wall Street Analyst, Personal Finance, journalist

July 10, 2025

Recent changes in credit reporting, collections and regulations are beginning to weigh on the two most uniquely American forms of debt – student loans and medical debt. The issues differ somewhat, but both reflect a regime shift between the Biden and Trump administration in debt collection, reporting and regulation. Following Covid and particularly during Biden’s term, student debt payments were reduced and/or paused and credit reporting was postponed and the CFPB passed a rule that restricted reporting and use of medical debt in loan approvals.

I will cover these separately as the issues are somewhat unique. The common theme is the common burden both present across a large swath of our population and both are a uniquely American feature of the consumer finance ecosystem.

The impact won't be isolated to medical and student debt as changes could have a spillover effect to other forms of debt. Specifically the increasing debt burden and damage to credit scores could increase credit risk to other forms of debt as well as materially reduce credit availability and affordability.

The situation is very fluid and changing by the day. Just yesterday the Department of Education (DoE) restarted accrual of interest on 8 million loans that were in forbearance without interest accrual. According to the Student Borrower Protection Center:

"In short, the Student Borrower Protection Center estimates that a typical borrower affected by this Trump Administration policy change will incur more than $3,500 in unnecessary interest charges per year or roughly $300 per month.

In the aggregate, the Trump Administration will pass on more than $27 billion in unnecessary costs to working families with student debt in the next 12 months alone."

And earlier this week Forbes report that a major student loan servicer told borrowers that the government's website removed critical information about income-driven repayments:

“Federal Student Aid has temporarily removed the forgiveness payment counts from StudentAid.gov for Public Service Loan Forgiveness and Income-Driven Repayment,” says an automated announcement on MOHELA’s main customer service phone line for Department of Education accounts. "Unfortunately, our representatives do not have any additional information related to your forgiveness counts. Please continue to visit StudentAid.gov for updates."

Student Debt

Background

The $1.8T ($1.7T Federal and around $100B private) student loan market is entering an unprecedented period of turmoil. This is critical as it is the largest source of non-mortgage consumer debt. Changes in collection practices, credit reporting policies and proposed legislative changes to the US Government student loan finance system as well as the possible dismantling of the Department of Education present historic challenges to the 42 million student loan borrowers and their parents. Among the critical changes to the student loan landscape are resumed credit reporting and collections including aggressive wage, tax refund and social security garnishment as well as proposed changes to repayment plans and availability of loans.

According to Transunion, just 44% of student loans are current with most of the 56% delinquent loans severely delinquent (90+ Days Past Due DPD). Unlike nearly all other types of debt, student loans cannot be discharged in bankruptcy. This is not only a risk for the government, but it puts the entire consumer debt stack at risk and may force more students into bankruptcy and/or redirect payments from other consumer loans to their student debt.

An Analyst Speaks and a Powerful Student Loan Company Responds

As a consumer loan and subprime mortgage MBS/ABS analyst at Credit Suisse in 2008, I published an article that suggested the government should take over direct lending of student loans. At the time, the government’s nascent direct lending program competed with the far larger private FFELP program. Though FFELP lenders were private, the government guaranteed the loans. In other words the government assumed all the risk and the private lenders assumed all the profits. And private lenders had limited tools and incentives for borrower friendly repayment options. This was the gist of my argument suggesting that the Department of Education's (DoE) Direct Loan program take over all government guaranteed student lending. Shortly after we published the article, my manager at Credit Suisse received an email from Sallie Mae, the largest student lender at the time (Sallie Mae had been a government agency before being privatized). Needless to say, they were not happy.

Below is a partial excerpt from the email:

“This looks like the baloney I have to read in the Washington Post and New York times. Why doesn’t Mr. Dubitsky just go on to say that FFELP apparently exists purely for the enrichment of lenders, servicers, investment banks and the law firms they employ.”

Well actually...

Two years later, the Obama White House signed the Healthcare and Education Reconciliation Act of 2010 effectively ending the FFELP program, transferring all student lending to the government's direct lending program, rendering my 2008 article somewhat prescient. Collections and servicing of the loans remained in the private sector.

Though the direct lending program benefited from offering a far higher percentage of income driven repayments vs the private federal loans (30% of direct loans in Income Driven Repayment vs 6% for private federal FFELP loans), despite the change, the nexus of government student loans and college cost contributed to an ongoing negative feedback loop, and likely was a factor in the simultaneous explosion in college costs and student debt.

While I don’t believe the government takeover of student loans impacted the college price/debt spiral, it certainly didn’t slow it down. When the government absorbs all the risk and colleges compete for students perhaps the debt / cost spiral was inevitable.

The above is to provide a bit of context for the current state of play.

What is the status of $1.7T federal student loans?

In order to understand where student loans are today it's important to understand the various reporting categories. Loans could be in required repayment (either current, delinquent or default), or in a status where no payment is required (in school, grace, forbearance, deferment). Further, for borrowers in repayment, they could be under one of several repayment plans including several categories of Income Driven Repayment (IDR).

Of the 44 million student loans outstanding, less than 50% or 18 million are actually in some repayment status. The average undergrad owes around $30K. See below for a breakdown of repayment status.

Source: DoE

Repayment plans and Forbearance

There are two broad types of repayment plans - 1) Income-Driven Repayment (IDR) and 2) level/graduated payments. The four different types of IDR plans total $700B while level/graduated payment plans total $525B.

IDR plans typically include: 1) payments set as a percentage of income and 2) forgiveness of payments after a specified number of years. Forgiveness can occur anywhere from 20 to 30 years, with payments ranging from 5 to 15% of income. As described below, the OBBB consolidates these plans into a single IDR called the Repayment Assistance Plan (RAP).

Currently, there are several IDR plans including: 1) Income-Based Repayment (IBR), 2) Income-Contingent Repayment (ICR) Plan, 3) Pay As You Earn (PAYE) and 4) the Saving on a Valuable Education (SAVE) Plan.

The SAVE program was a Biden era repayment plan that capped payments at 5% of income, unpaid interest didn't accrue and the balance was forgiven after a specified period as short as 10 years. After being successfully challenged in court, the program was paused. After being placed in legal limbo, borrowers on the SAVE repayment plan were placed into general forbearance. Resolution of the legal challenges is still pending.

As shown in the chart below, borrowers in forbearance spiked sharply in 2024 to 10 million due to SAVE's legal challenges.

SAVE IDR program pause leads to massive increase in forbearance

Key Changes to Student Loan Regulations and Policies

Resumption of credit bureau reporting leads to plunging credit scores and spiking delinquencies

Student loan payments were paused during Covid until October 2023 when required payments resumed. After payments resumed, there was one additional year pause for negative credit bureau reporting. The negative reporting resumed in October 2024 with a resulting material impact on credit scores and delinquency rates in Q1 2025. This change in credit reporting led to a 10x increase in student loan delinquencies, which largely reflects the change in reporting rather than a dramatic change in performance. See chart below.

Student Delinquencies Spike After Credit Reporting Resumes (Source: FRB)

As a result of the resumption of bureau reporting, 5 million student loan borrowers have been reported to credit bureaus, a number expected to reach 9 million according to FRBNY estimates.

2.8 million borrowers that were newly delinquent had a mid-prime or prime credit score of 620 and above prior to the newly reported delinquency. According to the FRB, 2.2 million borrowers saw a decline in credit score of 100 points. Even prime borrowers with a score over 720 saw their credit score drop, with 400K borrowers seeing an average drop of 170 points.

Source: FRB/Liberty Street

This drop in credit scores will reverberate across the entire credit spectrum for borrowers as everything from credit cards to auto loans to mortgages will now be more expensive or simply unavailable for millions of student loan borrowers.

The below chart from Transunion which is more up to date shows a different view. The percent of borrowers that were prime went from 22% to 2% after the reporting change. Surprising to me, is not just the drop but rather that only 22% of student loan borrowers are prime even with credit reporting on hold and a college degree.

Collections and garnishment to increase

In addition to the resumption of credit reporting and repayments, collections on defaulted loans resumed on May 5th. According to student loan servicer Nelnet, they have already seen a 9x increase in loans 5 months past due - the edge of default. Unless those borrowers can catch up, the inevitable will happen – the default of millions of student loans.

On a positive note, in 2022 Biden streamlined the process to discharge student loans in bankruptcy. While the law to discharge student loans didn't change, the Extreme Hardship exception was clarified leading to a surge in bankruptcies.

I suspect the bankruptcy court may be busier than ever as borrowers work through more aggressive enforcement of student loan debt. Indebted students will look to discharge student loans or, failing that, they will discharge auto and credit card loans which are generally easier to discharge.

Either way, expect the bankruptcy courts to be very busy.

Wage, tax refund and social security garnishment

To enforce collections the government is moving aggressively to garnish wages, tax refunds and even social security payments.

According to the DoE website: “Later this summer, all 5.3 million defaulted borrowers will receive a notice from Treasury that their earnings will be subject to administrative wage garnishment.”

It may be surprising to learn that 2.9M student loan borrowers are on social security, a near doubling in recent years.  Wrap your head around nearly 3 million Americans earning social security yet still having to pay off student loans. The government recently temporarily paused their plan to garnish SS income, but it could resume at a later time.

Blowback on non-student debt – potential rising bankruptcies to discharge other debt

Aggressive wage garnishment could result in massive swing in priority of payments towards student loans and away from auto and credit card debt where wage garnishment and bankruptcy discharge are less onerous.

With auto and card delinquencies rising, aggressive collections on student loans could result in blowback to card and auto lenders.

It’s possible that students have been prioritizing paying non-student debt given the Biden administration’s benign approach to student loan payments. However, now that Good Cop has given way to Bad Cop, it’s possible that some portion of the 20M borrowers that have fallen behind on student debt resume payments on student loans in preference over other loans that are more easily dischargeable in bankruptcy or less capable of garnishment.

This may result in further increases in consumer bankruptcies as student loan debtors have face a stark choice between garnishment and defaulting on their non-student debt. Auto loans and credit card loans are particularly vulnerable.

Staffing and governance confusion

Adding to the confusion are the dramatic cuts in student loan staffing as the result of DOGE restructuring of the DoE as well as the announcement that the the student loan program will be transferred to the Small Business Administration (SBA). While the SBA has loan processing experience, student loans are a world apart. Presumably the current student loan servicers (private sector entities) will continue in their role. While the move to the SBA appears to be on hold, the turmoil is real. According to the NY Times:

"Trump’s decrees, coupled with plans to fire 46% of the Education Department’s employees, hollowed out the agency’s already understaffed Federal Student Aid office to the point of near collapse, according to current and former agency employees."

At a time when government action has caused a radical increase in the need for the DoE to be responsive, the government has instead scaled down and restructured operations. It will be interesting to see how the garnishment operations will be carried out in light of the staffing cuts and restructuring.

Additional Legislative Changes Adds to the Turmoil

The OBBB included a number of changes impacting student loans.

Income Driven Repayment Plans to Be Consolidated

Income Driven Repayment (IDR) plans will be consolidated into a single Repayment Assistance Plan (RAP) beginning in July 2026. Given the confusion and legal challenges around various repayment plans, the idea of consolidating IDR plans is sensible.

The new RAP terms extend the loan repayments to 30 years (from 20-25) before the loan can be forgiven. It also uses a much higher income figure to calculate the required payment. The RAP plan uses Adjusted Gross Income (AGI) to calculate the payment, while previous IDR plans used discretionary income. Discretionary income was calculated by deducting a multiple of the basic poverty level from the AGI. The percentage student loan payment was then applied to that discretionary income.

Though the income threshold is now much higher under RAP, the base payment % is lower and scales up based on income levels. The payment change moving to RAP depends on a number of factors including family size, number of independent children and marital status For middle to - upper middle income borrowers the payment will be much higher under RAP.

Below is a breakdown of the various IDR plans, with by far the largest being SAVE which grew to 8 million student borrowers.

Caps on Borrowing and Elimination of Certain Loan Types

OBBB also created a lower absolute cap on the amount loans that can be taken which could dramatically impact graduate students including those in lucrative fields such as law and medicine. The largest impact in terms of borrowing capacity is the elimination of the Grad-Plus program which essentially allowed grad students to borrower an unlimited amount.

Elimination of this program means many potential grad school students won't be able to afford to attend grad school or will be forced into far more expensive private loans.

Colleges endowments face higher taxes

Under the OBBB, colleges with high rates of student loan defaults would be partly responsible for loan repayment. Further, OBBB includes a dramatic increase in taxation of college endowment investment income which could reduce the amount available for scholarships. The highest tax rate is now 8% compared to 1.4% under current law.

Bending the college cost curve back is critical. Setting caps on total amount of loans and making colleges responsible for defaulting borrowers could both reduce the amount of debt available and add some scrutiny on the part of colleges to ensure income generating ability of students post graduate is consistent with the amount of debt they are taking on.

However, adding risk sharing to colleges could disproportionately impact schools with more disadvantaged students and the cost sharing expenses may boomerang back on the students in the form of higher tuition or reduced scholarships. But in concept just as the government cracked down and penalized for profit colleges, non-profit and state colleges ought to have skin in the game in terms of bearing the burden defaulted student loans. Too often colleges ratcheted up tuition on the back of the ability of students to get government guaranteed loans.

Medical Debt

America stands alone in developed countries in burdening consumers with medical debt. The simple reason is that most developed countries provide affordable, universal healthcare. While medical debt does exist elsewhere, only in the USA are they a pernicious form of debt enslavement incurred at time when the debtor is also confronting health issues. Medical debt is the leading cause of bankruptcy and unpaid medical bills are the largest source of debt reported to collection agencies. Getting sick in a America can pose a triple threat – 1) the illness itself, 2) lost wages, 3) large out of pocket expenses potentially leading to unpaid medical bills and medical debt.

While not as large as other consumer debt categories, medical debt impacts 1/3 of the population or 100 million people. According to the American Medical Association,

“An estimated 100 million people in the United States (41 percent of adults) have debt related to unpaid medical bills, totaling between $195-220 billion.”

Of that 100 million 20 million owe the money directly to their medical service provider while the remaining 80 million owe money to non-medical related creditors (e.g. credit cards). Kaiser Family Foundation (KFF) found 14 million had medical debts over $1,000 and 3 million had debts over $10,000.

See below table for a snapshot of medical debt.

Having health insurance alone isn’t a barrier to medical debt. In fact, around 30% of the insured population reports medical related debt. Copays, deductibles, out of network charges, drugs not covered in a plan are but a small sample of how even those with health insurance can fall in the medical debt trap.

Medicaid rules and proposed cuts could exacerbate medical debt issues

One of the factors contributing to medical debt are states that opted out of the Affordable Care Act’s Medicaid expansion. Consumers in those states are more likely to incur unaffordable out of pocket (OOP) medical expenses.

With the passage of the OBBB, the CBO estimates that 10 million will lose Medicaid which could result in a dramatic increase in the incidence of medical debt.

One friend whose health insurance is fully subsidized, estimates that his family's health insurance premiums could increase by $700/month under the OBBB.

Trump Reversal of CFPB Medical Debt Reporting Pause Could Impact 15 Million Consumers

In 2023 the credit reporting agencies agreed to voluntarily restrict reporting of medical debt below $500. The Consumer Finance Protection Bureau (CFPB) went a step further and banned all reporting of medical debt to the credit bureaus and banned the use of medical debt in credit underwriting.

The CFPB ruling which took effect in January 2025, has been subject to legal challenges. The Trump administration paused the CFPB initiative which could result in 15 million consumers seeing their credit reports and scores adversely effected.

The amount of medical debt in collections most recently was $49B, a reduction from $88B prior to the credit bureaus voluntary reporting restrictions. The CFPB justified their action by arguing that the adverse impact on consumers was material and that medical debt had no predictive value in consumer credit default probability. The CFPB found that those with adverse medical reporting on the credit report tend to be lower income and live in the south.

According to the Commonwealth Fund:

“In 2021, medical debt made up 58 percent of consumer debt on credit reports. A major reason why medical debt surpasses other types of debt is the very high cost of U.S. health care, combined with weaknesses in our health insurance system that leave many people exposed to those costs.”

Conclusion

In the end, America’s unique debt dilemma is only getting more complicated. The latest regulatory and legislative shifts have left millions of borrowers caught between policy extremes—whiplashed by changing rules and mounting uncertainty. Student loan and medical debt, once again, loom as defining features of the American financial landscape: harder to escape, more costly to carry, and increasingly likely to adversely impact millions families across the country. Unless policymakers find a better solution to this uniquely American burden, the debt will remain a drag on both wallets and well-being.