Student Loans in Default to be Referred to Debt Collection

Introduction to the Issue

The Education Department will begin collection next month on student loans that are in default, including the garnishing of wages of potentially millions of borrowers, officials said Monday. Currently, roughly 5.3 million borrowers are in default on their federal student loans.

Background on the Decision

The Trump administration’s announcement marks an end to a period of leniency that began during the COVID-19 pandemic. No federal student loans have been referred for collection since March 2020, including those in default. Under President Biden, the Education Department tried multiple times to give broad forgiveness of student loans, only to be stopped by courts.

Statement from the Education Secretary

“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” Education Secretary Linda McMahon said. Beginning May 5, the department will begin involuntary collection through the Treasury Department’s offset program, which withholds government payments — including tax refunds, federal salaries and other benefits — from people with past-due debts to the government. After a 30-day notice, the department also will begin garnishing wages of borrowers in default.

Criticism from Advocates

The decision to send debt to collections drew criticism from advocates, who said borrowers had experienced whiplash and confusion with the changing student loan policies between the Biden and Trump administrations. “This is cruel, unnecessary and will further fan the flames of economic chaos for working families across this country,” said Mike Pierce, executive director of the Student Borrower Protection Center.

Borrower Preparation

Already, many borrowers have been bracing for obligations coming due. In 2020, President Trump paused federal student loan payments and interest accrual as a temporary relief measure for student borrowers. The pause in payments was extended multiple times by the Biden administration through 2023, and a final grace period for loan repayments ended in October 2024. That meant tens of millions of Americans had to start making payments again.

Current Status of Borrowers

Borrowers who don’t make payments for nine months go into default, which is reported on their credit scores and can go to collections. Along with the borrowers already in default, about 4 million others are 91 to 180 days late on their loan payments. Less than 40% of all borrowers are current on their student loans, department officials said.

Challenges Faced by Borrowers

Layoffs at the Federal Student Aid office at the Education Department have made it harder for students to get their questions answered, even if they wanted to pay their loans, said Kristin McGuire, executive director of Young Invincibles, a group that focuses on economic security for younger adults. And questions are swirling about certain income-driven repayment programs after a February court ruling blocked some Biden-era payment plans, placing borrowers in the more lenient SAVE Plan in forbearance. The Education Department in February took down applications for income-driven repayment programs — which tie a monthly payment to a person’s income level — only to bring them back online a month later.

Avoiding Wage Garnishment

For borrowers in default, one step to avoid wage garnishment is to get into loan rehabilitation, said Betsy Mayotte, president of the Institute for Student Loan Advisors. Borrowers must ask their loan servicer to be placed into such a program. Typically, servicers ask for proof of income and expenses to calculate a payment amount. Once a borrower has paid on time for nine months in a row, they are taken out of default, Mayotte said. A loan rehabilitation can be done only once.

Previous Efforts at Loan Forgiveness

Biden oversaw the cancellation of student loans for more than 5 million borrowers. Despite the Supreme Court’s rejection of his signature proposal for broad relief, he waived more than $183.6 billion in student loans through expanded forgiveness programs.

Conclusion

The decision to refer student loans in default to debt collection marks a significant shift in the approach to managing student loan debt. While the Education Department aims to promote responsible borrowing and repayment, critics argue that this move will exacerbate economic hardship for many borrowers. As the situation continues to evolve, it is essential for borrowers to understand their options and seek assistance when needed.

FAQs

• Q: What happens to borrowers who are in default on their federal student loans?
  A: Borrowers in default may face wage garnishment and collection of their debt through the Treasury Department’s offset program.
• Q: How can borrowers avoid wage garnishment?
  A: Borrowers can avoid wage garnishment by getting into loan rehabilitation, which requires making nine consecutive on-time payments.
• Q: What is the current status of income-driven repayment programs?
  A: The status of income-driven repayment programs is uncertain due to recent court rulings and changes in application availability.
• Q: How many borrowers are currently in default on their federal student loans?
  A: Approximately 5.3 million borrowers are in default on their federal student loans.
• Q: What is the Education Department’s stance on student loan policies?
  A: The Education Department aims to promote responsible borrowing and repayment, and will begin referring loans in default to debt collection starting May 5.