Brokers will have to find creative solutions for borrowers who may find themselves struggling to qualify
The recent announcement by the Trump administration to begin the collection of default student loans will add to the affordability and credit issues for some borrowers, according to one industry expert.
Collection of delinquent student loans will begin May 5, 2025, according to the announcement made by the administration on April 21. Borrowers who cannot pay will be subject to having wages garnished, and pensions and tax returns taken. The plan will affect approximately 5.3 million borrowers.
At a time when affordability is a concern for many mortgage customers, one industry expert believes this could be the tipping point that keeps people from owning homes.
Jeremy Davis (pictured top) is the president of mortgage at Southern Bancorp. He believes the impacts of these collections could be felt fairly soon for borrowers with delinquent student loans.
“It’s going to hit people harder than they realize,” Davis told Mortgage Professional America. When a defaulted student loan pops back up on a credit report, especially if it is flagged as ‘delinquent,’ it can drag scores down fast.”
For borrowers already struggling to qualify due to lower credit scores, Davis thinks a quick drop in score may be too much to overcome.
“For customers teetering on the edge of qualifying, even a 20-point dip in credit score can be the difference between getting approved or getting priced out,” Davis said. “The frustrating part is that a lot of borrowers thought these loans were frozen in time. Now they are being blindsided as communication has been, let’s just say, lacking.”
Borrowers young and old will be affected
Brokers working with both younger and older mortgage customers could see the impact of these collections. Sam Williamson, senior economist at First American, believes this new policy could have a major impact on high debt-to-income (DTI) ratios.
“Renewed collections on defaulted student loans will mainly impact younger borrowers in their 20s and 30s and older borrowers over 65,” Williamson told Mortgage Professional America. “For younger borrowers, it will be harder to save for a down payment, while also making it harder to qualify for a mortgage due to high DTI. This likely results in borrowers delaying their goal of homeownership.”
Trump’s first 100 days exposed a deep rift in the mortgage industry. Rising rates, tightening credit, and fears over worsening affordability have split experts: those betting on the resilience of housing, and those warning of a looming crisis. https://t.co/UvXilMznGp
— Mortgage Professional America Magazine (@MPAMagazineUS) April 29, 2025
For borrowers on fixed incomes, an additional unexpected expense could force them to sell property, bringing more inventory into the market. Williamson believes the effects on the market will be more gradual.
“Meanwhile, older borrowers, many of whom are in default on their student loans and typically rely on fixed incomes, may be forced to downsize, which could inadvertently free up homes for younger families,” Williamson said. “These shifts are expected to unfold gradually as credit scores adjust, rather than triggering an abrupt market downturn.”
Davis agrees that DTI challenges could be on the table, but it might not cause all affected borrowers to give up on homeownership.
“It is definitely going to tighten things up,” Davis said. “DTI was already on a diet because of home prices and rates, and now here comes student loans, piling a second helping on the plate. Wage garnishments or resumed payments could push more buyers just over the eligibility line.
“That said, not every buyer is going to be knocked out. Some will need to recalibrate their budget or timing. Some will qualify under alternative programs. Our job is to stay nimble and solution-minded. If affordability is the storm, we have to be the umbrellas.”
Asking the uncomfortable questions
Davis believes brokers and loan originators are going to have to work harder to confirm that mortgage customers are not subject to these new loan collections.
“First, pull credit early and often,” Davis said. “Think of it like planning an outdoor wedding. You hope for blue skies, but you rent the tent anyway because preparing early gives you options. Second, ask the uncomfortable questions. I know nobody likes poking the bear, but you cannot assume customers know the real status of their loans. A simple, clear conversation now saves a world of trouble later.”
Once brokers confirm that mortgage customers might be subject to these new collections, they can help borrowers take the necessary steps to control their situation.
“Align with lenders, credit repair pros, and housing counselors, whoever you need on speed dial to create solutions,” Davis said. “Remind customers that there is no shame in hitting pause if it means buying smarter and safer down the road. Success delayed is not success denied.”
Davis believes brokers will have additional tools to help challenged customers through any new credit or garnishment issues.
“Watch for ‘fresh start’ programs and flexible repayment options,” Davis said. “There are some genuine lifelines out there for borrowers willing to act. Smart brokers and loan officers will be ready with real, trustworthy resources, not just advice that sounds good in a sales pitch.”
It will likely be a confusing, frustrating time for borrowers subject to these collections. Many of them may get conflicting information. Davis thinks that’s where brokers can shine.
“Not all loan servicers are running like well-oiled machines right now,” Davis said. “Borrowers might get conflicting letters, missed calls, or just plain bad advice. Be the calm in the chaos. Triple-check documentation, get everything in writing, and coach your customers to advocate for themselves.
“Here is the hope. Credit is not a tattoo. It is a living thing that can heal and grow. If we get in early with good advice and smart planning, many borrowers can bounce back stronger than before.”
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