Student Loan Collections Are Back — How States Are Helping Borrowers Avoid Default

After a four-year pause, federal student loan collections have resumed — and millions of borrowers are now at risk. In response, states across the country are moving quickly to provide support and solutions before borrowers spiral deeper into financial distress.

Here’s what’s happening, which state programs are leading the way, and what you can do to protect yourself or your borrowers right now.Collections Are Back — Millions at Risk

In May 2025, the U.S. Department of Education officially restarted collections on defaulted federal student loans — a major shift after the pandemic-era pause that began in March 2020.
The stakes are high:

• 5 million borrowers are currently in default and subject to collection actions.
• Another 10 million borrowers — about 25% of the federal loan portfolio — are at risk of default in the coming months.

For these borrowers, the consequences are severe. Federal collections can include:

• Wage garnishment
• Seizure of tax refunds
• Withholding of Social Security benefits

Unfortunately, many borrowers are unprepared — or even unaware — that collections have resumed.Borrowers Are Confused and Scared

State ombuds offices and nonprofit advocates are reporting an overwhelming surge in calls from borrowers of all ages — from recent grads to retirees.

Many borrowers are confused about:

• What repayment plan they are on
• Whether they qualify for loan forgiveness
• Whether they are already in default
• What their options are to avoid collections

One California ombuds office reports that they are fielding calls from borrowers ranging in age from 20 to 90 — many of whom feel lost in a tangle of conflicting information from federal and state agencies.How States Are Stepping In

In response to this growing crisis, 16 states plus Washington, D.C. have created student loan ombuds offices or helplines. These teams:

• Provide one-on-one support for confused or distressed borrowers
• Run workshops and outreach events to educate borrowers about their options
• Help borrowers navigate paperwork and enrollment in programs like income-driven repayment (IDR) or loan rehabilitation
• Handle formal complaints against servicers and collectors

Some states are also:

• Offering mini-grants to reduce default risk
• Adjusting state tax policies to ease student debt burdens
• Regulating private loan servicers at the state level

Spotlight: Illinois Leading With Bold Moves
One of the most aggressive state responses is unfolding in Illinois, where student loan debt totals over $63 billion, the 7th highest in the country.

SmartBuy Program
Illinois launched the SmartBuy program, which offers:

• Up to $40,000 in student loan repayment assistance
• An additional $5,000 in down payment assistance to help borrowers become homeowners

To date, this program has helped over 750 households transition from renters to homeowners — tackling both debt and housing challenges simultaneously.

Student Empowerment Fund
In 2024, Illinois also created a $1.5 billion Student Empowerment Fund to provide lower-interest private loans to in-state students — reducing their reliance on higher-cost private lenders.Systemic Gaps and Debt Traps Remain

Despite these efforts, significant gaps persist:

• Borrowers with private loans (~10% of Illinois graduates) lack federal protections and forgiveness options.
• Many state and federal relief programs have strict eligibility criteria that leave public service workers and older borrowers without options.
• The well-known Bennett Hypothesis suggests that tuition prices often rise in tandem with loan availability — making affordability a persistent challenge.

What Needs to Happen Next
Experts are calling for coordinated solutions at both the federal and state levels, including:

• Simplified repayment plans with clear pathways to forgiveness
• Stronger oversight of loan servicers
• Expanded eligibility for relief programs
• State-federal collaboration to scale successful programs like SmartBuy

Illinois and a handful of other states are demonstrating that targeted, state-led innovation can meaningfully improve borrower outcomes — but national leadership is needed to close the remaining gaps.What You Can Do Right Now

If you are a borrower:
  Check your loan status immediately — are you in good standing?
  Explore repayment options like IDR or consolidation to avoid collections.
  Get help — contact your state ombuds office or use services like LoanSense to navigate your next steps.

If you are a lender or loan officer:
  Be proactive — educate your borrowers about these changes.
  Partner with tools like LoanSense to help borrowers manage their debt and improve mortgage eligibility.

  Stay updated — state programs like SmartBuy are great models to help your clients.Final Takeaway
Student loan collections are back — and the clock is ticking for millions of borrowers.
State programs are making a real difference, but borrowers and lenders alike need to take action now to avoid financial harm and to seize opportunities for relief.
Watch our full video breakdown to learn more about what’s happening and what you can do.

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