A Pandemic Debt Reckoning Forces Congress to Act

Why It Matters

A new Congressional Research Service report lays out the full dimensions of a slow-moving financial crisis: hundreds of thousands of small businesses that borrowed from the federal government during the COVID-19 pandemic are now defaulting on those loans, facing wage garnishment, Social Security offsets, and potential litigation. Congress is scrambling to figure out what, if anything, to do about it.

The report, updated May 28, 2026, examines the SBA EIDL COVID-19 program (the Economic Injury Disaster Loan initiative that became one of the largest emergency lending programs in American history) and presents lawmakers with a menu of financial relief options, each carrying high costs, risks, and political consequences. With $75.2 billion already charged off and 562,000 defaulted loans recently referred to the Department of the Treasury and the Department of Justice for collection, the question is no longer theoretical.

On one side of the report sits the federal government's legitimate interest in recovering hundreds of billions of dollars in COVID-19 small business assistance that was lent, not given, to borrowers who signed 30-year repayment agreements. On the other side sit millions of small business owners, many of them still struggling with the long-term economic damage of the pandemic, who are now discovering that the government intends to collect by any means necessary.

The SBA's temporary permission to continue servicing defaulted COVID EIDLs expired on March 31, 2026. Within weeks, the agency announced it had transferred 562,000 pandemic-era loans worth $22 billion to Treasury and the Department of Justice, which it called its "largest referral package on record." Those transfers triggered the full arsenal of federal debt collection: offsets against Social Security benefits, federal income tax refunds, and federal contractor payments; administrative wage garnishment; and the prospect of litigation.

For the small business owner who borrowed $80,000 in 2020 to keep employees on payroll and the lights on, the arrival of a notice that their Social Security check will be reduced to repay a pandemic-era debt is not an abstraction. It is a constituent crisis, and Congress is hearing about it.

The CRS report makes clear that this tension has no clean resolution. Every relief option available to Congress carries either enormous fiscal costs, serious precedent-setting risks, or both.

The Big Picture

When the CARES Act was passed in March 2020, Congress dramatically expanded the SBA's existing Economic Injury Disaster Loan program to meet an unprecedented emergency. The results were staggering in scale. SBA ultimately approved more than 3.9 million COVID EIDLs totaling over $378.4 billion. It disbursed $20 billion in Emergency EIDL Grants that required no repayment, $5.2 billion in Targeted EIDL Advances, and another $2.3 billion in Supplemental Targeted Advances. The loans carried interest rates of 3.75 percent for small businesses and 2.75 percent for nonprofits, with repayment terms of up to 30 years.

The program received 27.7 million applications by the end of 2021 before the SBA closed the portal in May 2022.

To ease the transition into repayment, SBA granted a series of payment deferrals, extending first payment due dates repeatedly, ultimately to 30 months from loan origination. It launched a Hardship Accommodation Plan in November 2022 that allowed struggling borrowers to temporarily reduce their payments. That program ended on March 19, 2025.

Why Now?

The charge-off data tells the story of what happened next. Through the end of the third quarter of fiscal year 2025, SBA had charged off $75.2 billion in COVID EIDLs, formally recognizing that recovery was unlikely on those loans. The numbers are striking in their trajectory: $52 billion was charged off in fiscal year 2023 alone, followed by $18.7 billion in fiscal year 2024, and $4.4 billion in just the first three quarters of fiscal year 2025.

Post-charge-off recovery has been minimal. SBA has recovered just $1.7 billion, roughly two percent of the $75.2 billion charged off. By comparison, the agency recovers 43 percent of charged-off amounts on its non-COVID disaster loans. The gap is not a rounding error; it reflects the sheer volume, the borrower profile, and the economic conditions that made these loans necessary in the first place.

The CRS report notes that the charge-off rate for SBA business disaster loans generally ranges from one to nine percent, depending on economic conditions. The COVID EIDL program's performance sits well outside that historical range.

Complicating any relief calculus is the fraud problem. GAO found that SBA had provided roughly $26 million in advances to potentially ineligible businesses and approved at least $156 million in loans to businesses SBA's own policies deemed ineligible. The SBA's Office of Inspector General identified thousands of disbursed loans totaling over $212 million issued to potentially ineligible borrowers. SBA's April 2026 press release framed its massive debt referral as targeting "suspected fraudulent loans," a characterization that conflates legitimate struggling borrowers with bad actors in ways the CRS report implicitly flags as a policy problem.

Political Stakes

For the Administration

The Trump administration faces a genuinely uncomfortable bind. Its fiscal posture, emphasizing debt reduction, spending cuts, and elimination of COVID-era relief programs, points toward aggressive collection. Its political identity as the champion of small business and Main Street America points in the opposite direction.

SBA ended the Hardship Accommodation Plan in March 2025, shortly after the administration took office. The April 2026 mass referral to Treasury and DOJ followed. Both actions are consistent with a government-wide push to recover pandemic-era funds and crack down on fraud. But the collateral damage (small business owners losing portions of their Social Security checks) is landing in congressional district offices across the country, generating the constituent pressure the CRS report explicitly acknowledges as a driver of this analysis.

The administration's broader effort to restructure and reduce the SBA's operational footprint adds another layer of complication. A smaller SBA is less equipped to administer any relief program, process hardship applications, or manage the ongoing complexity of a 30-year loan portfolio.

For Republicans

Republican lawmakers represent a disproportionate share of the small business owners who took out these loans. The disaster loan policy options laid out in this report (reduced interest rates, extended deferments, targeted forgiveness) are not traditionally conservative positions. But neither is watching constituents lose Social Security benefits over pandemic-era debts incurred when the federal government was actively urging businesses to borrow.

The CRS report notes that forgiving COVID EIDLs of $25,000 or less (covering roughly 1.9 million loans) would cost approximately $20 billion. Forgiving loans of $100,000 or less would cost roughly $76 billion. Those are not small numbers for a caucus focused on fiscal restraint.

For Democrats

Democrats championed the original COVID-19 small business assistance programs and have a political incentive to advocate for relief now. But they also face the awkward reality that the most aggressive recent debt collection actions, including the January 2024 decision to begin referring defaulted loans to Treasury, were initiated under the Biden administration. The CRS report's timeline makes that clear.

For the Public

The stakes for ordinary Americans are direct. The Treasury Offset Program can reduce Social Security benefit payments to recover delinquent federal debts. For a small business owner who closed their shop, exhausted their savings, and is now relying on Social Security, that offset is not a policy abstraction. The CRS report's description of available collection tools (wage garnishment, tax refund seizure, and litigation) reads, in practical terms, as a catalogue of financial hardship for people who borrowed in good faith during a national emergency.

The Bottom Line

Two things stand out from this report as essential public knowledge.

First, the scale of the problem is enormous, and the government's current approach is causing real harm to real people. $75.2 billion in COVID EIDL loans have already been written off as unrecoverable. Hundreds of thousands of borrowers are now in federal debt collection. The safety net programs Americans pay into over their working lives, like Social Security and tax refunds, are being used as collection instruments against small business owners who borrowed during the pandemic.

Second, there are no easy policy exits. The CRS report is careful and nonpartisan in its presentation, but its analysis makes clear that every relief option carries significant costs or risks. Broad loan forgiveness could cost tens of billions of dollars, reward fraudulent borrowers, set precedents that undermine the entire disaster loan framework, and compromise SBA's ability to fund disaster assistance for future hurricanes, floods, and wildfires. Doing nothing continues the current trajectory of defaults, charge-offs, and constituent hardship.

The report notes that disaster loan forgiveness has happened only twice in the program's history: after Hurricane Betsy in 1965, and through the Paycheck Protection Program, which was explicitly designed as a forgivable loan from its inception, unlike the EIDL program.

Congress built the COVID EIDL program as a loan program. The borrowers who took those loans understood they would need to repay them. What neither Congress nor those borrowers fully anticipated was that the economic disruption of the pandemic would prove long enough and deep enough that repayment, for a significant share of borrowers, would become impossible. The gap between what was promised and what is possible is the policy problem this report is trying to help Congress solve.