Buying a Home with Student Loans? Wage Garnishment Could Change the Game

Starting May 5, 2025, the Trump administration will officially resume collections on defaulted federal student loans—a process that had been on pause since March 2020 due to the COVID-19 pandemic. With this shift, millions of borrowers could soon face aggressive collection measures like wage garnishment, tax refund interceptions, and Social Security offsets.

While this may seem like a purely financial policy change, its ripple effects extend into the housing market, particularly affecting potential homebuyers already grappling with student debt. Here's how this move could reshape the path to homeownership—and what borrowers can do to stay on track.

💸 What’s Changing With Student Loan Collections?

After over four years of forbearance, the Department of Education will begin collecting from the estimated 5 million borrowers currently in default. Another 4 million borrowers who are seriously delinquent may not be far behind.

Key actions include:

• Wage Garnishment: Borrowers could see up to 15% of their paychecks withheld by employers.

• Tax Refund & Social Security Offsets: The Treasury Department may seize tax refunds or reduce Social Security payments.

• Loan Servicer Outreach: Collections will restart after a 30-day notice is given to borrowers.

🏠 How This Impacts Aspiring Homebuyers

1. Less Take-Home Pay = Less Homebuying Power

With garnishments reducing disposable income, many would-be buyers may struggle to save for a down payment, afford closing costs, or meet minimum mortgage payments—especially in today’s high-rate environment.

2. Damaged Credit = Tougher Loan Terms

Defaulted student loans show up on credit reports and can severely lower credit scores. This can disqualify borrowers from mortgage approval or saddle them with higher interest rates.

3. Debt-to-Income Ratios Get Riskier

Mortgage lenders place heavy emphasis on your debt-to-income (DTI) ratio. New garnishments and repayments could push borrowers above the DTI thresholds that lenders use to approve home loans.

🏘️ Effects on the Housing Market

Lower Demand, But No Crash Expected

While some drop-off in demand is likely—especially among Millennial and Gen Z buyers—it’s not expected to derail the housing market. A healthy supply-demand imbalance, strong investor activity, and continued wage growth should keep prices from falling sharply.

Renting as a Long-Term Alternative

Many borrowers may decide to delay buying a home and continue renting, which could further increase pressure on already-tight rental markets, pushing rents even higher in some areas.

🔑 Solutions and Support for Borrowers

✅ Rehabilitate or Consolidate

Borrowers in default have options to get back on track. Loan rehabilitation can remove the default from your credit report, while consolidation simplifies repayment into one manageable loan.

✅ Switch to an Income-Driven Repayment (IDR) Plan

IDR plans calculate monthly payments based on your income and family size. Many borrowers qualify for significantly reduced payments—or even $0 monthly payments in some cases.

✅ Look Into Homebuyer Incentives

If you're a first-time homebuyer in Connecticut, the CHFA Smart Rate program offers a 1.125% interest rate reduction on CHFA first mortgage loans. This can help offset the financial pressure from student loans and make homeownership more affordable. Learn more here.

🤝 We’re Here to Help

If you’re navigating student loan repayments and thinking about buying a home, don’t go it alone. Contact us below for personalized advice on how to position yourself for success in today’s challenging landscape.

🧭 Final Thoughts

As wage garnishments and student loan collections resume, many Americans will face difficult choices about their financial future. For aspiring homeowners, understanding the implications—and taking proactive steps now—could make all the difference.

Whether it's improving your credit, managing your DTI, or exploring programs like Connecticut's Smart Rate, smart planning today can keep your homeownership dreams within reach tomorrow.

📞 Ready to talk? Reach out to us below to get started.