A five-year pandemic-era pause is coming to an end as the U.S. Department of Education announces it will restart the process of involuntary collections, including wage garnishments, of defaulted federal student loans. The department says collections will begin as early as May 5.
"American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies," said U.S. Secretary of Education Linda McMahon in a press release.
For five years, collection activity on federal student loans has been mostly paused to varying degrees by both the Trump and Biden administrations as a way to offer relief to struggling borrowers in the wake of the COVID pandemic in the hopes of getting borrowers current on loans.
A report by the nonpartisan Congressional Research Service finds that outstanding federal education debt is more than $1.6 trillion, with more than 42 million Americans holding those loans. According to the Education Department, more than 5 million borrowers are currently in default on their federal student loans. Four million borrowers are currently in late-stage delinquency. As a result of resumed collections, more borrowers already struggling amid economic uncertainty could fall into delinquency or default status regarding their loans.
A loan generally becomes delinquent when a payment is late by more than 90 days, while a default occurs after around 270 days of missed payments. Federal student loan borrowers in default lose eligibility for income-driven payment plans, deferment, and federal aid until they resolve their status.
The consequences for defaulting on federal student loans are serious. Defaulted borrowers face seizures of their tax refund, garnishment of social security benefits, and even risk wage garnishment. A press release issued by the Education Department said it will send notices of wage garnishment - seizing up to 15% of a borrower's disposable income - later this summer. In the meantime, the department is urging borrowers in default to start making monthly payments or enroll in an income-driven repayment plan.
Borrowers in default should be contacted by the Department of Education before May 5. Borrowers can also check their loan status by logging into StudentAid.gov.
If a borrower is in default, there are several options:
Loan consolidation is a quicker fix, but it can add collection costs. It involves paying off your defaulted loans with new repayment terms. It does not erase the default mark from your credit report, but does make you eligible for lower payment options.
Loan rehabilitation is another option for borrowers. Consumers must make nine consecutive on-time payments of an amount that's typically based on their income. Once those payments are made, the loan is taken out of default and the default mark is removed from their credit report.
If you are struggling with your loans, you can contact the government's Default Resolution Group for guidance on your loan options.
For additional resources, including legal advice and tips for dealing with collections, check out the Student Loan Borrower Assistance project by the National Consumer Law Center.
