Student Loan Wage Garnishment Could Reshape Cardholder Cash Flow in 2026

The U.S. Department of Education is sending notices this month to student loan borrowers who are in default on their student loans. The notices inform borrowers that the department will garnish their wages until they have paid their past due payments in full or otherwise resolved the default status of their loans. 

Wage garnishments for student loan borrowers in default were put on pause during the pandemic.

Large-scale wage garnishment stands to impact credit card issuers on a number of fronts because it means that many borrowers will likely have less cash on hand to spend on credit cards.

The good news for issuers is that they have time to prepare as wage garnishments will start slowly in 2026.

A spokesperson for the Department of Education told National Public Radio (NPR) that the first notices will go out in early January but are limited to approximately 1,000 borrowers in default on their student loans. 

Nearly 12 million borrowers have fallen behind on their federal student loan payments.

However, the spokesperson indicated that the volume of wage garnishment notices going out will likely increase over the course of the year. Many borrowers could face wage garnishment in relation to their student loans.

Just shy of 12 million borrowers haven’t kept up with their student loan repayments, according to data from public policy think tank, the American Enterprise Institute (AEI). But not all of those borrowers are in the same position in regard to their loans.

“Among those 12 million delinquent or defaulted borrowers, 5.3 million have been continuously in default since before the payment pause began,” Preston Cooper, Senior Fellow at AEI, wrote in a report on the matter. “The other 6.6 million have become newly delinquent since the pause ended.”

Student loan borrowers in default may see up to 15% of their pay taken out of their paychecks, according to a Wall Street Journal report. That means a portion of the population may see their disposable income take a significant hit this year.

Credit card issuers should prepare for the fact that cardholders in default on their student loans may alter their credit card spending habits this year, all else being equal.

Issuers also may face an increase in missed payments from affected borrowers, as money people could have applied to their monthly card payments instead goes toward their student loans.

Card issuers can analyze their customer portfolios to gauge how many of their cardholders may have to grapple with wage garnishments in 2026.

Rising costs of health care may also strain household budgets in 2026.

Some consumers may also be encountering other financial obstacles. Betsy Mayotte, President and Founder of The Institute of Student Loan Advisors, told NPR that many borrowers who have defaulted on their student loans are facing higher costs for health care.

“The two will almost certainly put significant economic strain on low and middle income borrowers,” Mayotte said.

Issuers who proactively communicate with their customers about ways to manage their household budgets during financial difficulties have an opportunity to mitigate the severity of cardholder struggles and build more customer loyalty.