Getting tough on student loans will be a teachable moment. The U.S. Department of Education is restarting collection efforts on federally backed debt used to pay for higher education, five years after the introduction of a pandemic-related reprieve. It’s a dangerous time to crack down, not least because flagging the liabilities to credit scorers risks making it harder to borrow as concerns about inflation and recession rise.

Some 43 million U.S. graduates owe more than $1.6 trillion in school-related debt. More than 5 million of them have failed to make a payment for at least a year and another 4 million are late by 90 to 180 days. Combined, almost a quarter of the portfolio, or $400 billion, will soon be in default.

The Biden administration’s persistent attempts to forgive loans failed to withstand legal scrutiny and the desire now to remove moral hazard is understandable. Education Secretary Linda McMahon said American taxpayers should not be providing “collateral for irresponsible student loan policies.” The White House also vowed to withhold money from tax refunds, federal pensions and wages for anyone who failed to pay.

Consumers benefited from Covid-19 relief, but it unduly boosted loan profiles. A risky borrower with student debt and a previous default enjoyed a 15% uplift in their credit score between early 2020 and mid-2023, according to a March study by the Federal Reserve Bank of New York. Since then, scores have slipped, but probably remain inflated.

Higher scores made it easier to borrow. The rate of seriously delinquent credit card loans, or ones at least 90 days past due, in 2021 and 2022 exceeded 8% after two years, about a third higher than ones originated in the four years before the pandemic, Consumer Financial Protection Bureau researchers found.

Past-due student loan payments also tend to damage credit scores more than other types of debt. A borrower with a solid mid-700s rating could fall below 600, or to subprime status, per the New York Fed study. Even debtors able to pay might get tripped up by pandemic-related confusion mixed into the student-loan program.

Sympathy may be limited for borrowers who can’t or won’t pay back their debts, but the Trump administration also will suffer consequences if enforcement restricts access to loans in an already-weak market. The president’s tariff-related “adjustment period” invites higher-priced goods and an economic slump. Americans facing a credit crunch would add to his crash course in consumer finance.

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The U.S. Department of Education said on April 21 that it would resume collections of defaulted student loans on May 2, five years after they were put on hold because of the pandemic. “American taxpayers will no longer be forced to serve as collateral for irresponsible student loan practices,” Education Secretary Linda McMahon said. Congress ordered repayments to start in October 2023, but the Biden administration delayed collections and sought to forgive some loans.

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