Topline
The Trump administration announced Monday it will resume debt collections for federal student loan borrowers who have defaulted on their debt, putting millions of borrowers at risk of having federal payments or portions of their salaries withheld in the coming months as the White House said it “can and will” take borrowers’ wages, pensions and tax refunds.
Secretary of Education Linda McMahon at the White House on April 16.
Key Facts
The Department of Education said it will resume collections on defaulted loans in the federal student loan portfolio, which includes Federal Family Education Loans, Direct Loans, Perkins Loans and Pell Grants, among others.
Defaulting on student loans happens when borrowers haven’t paid their loans for a certain amount of time—which in most cases is 270 days, or approximately nine months—at which point the entire amount they owe, plus interest, becomes due.
The move will impact millions of borrowers, as the Education Department said more than five million borrowers are already in default on their loans, and an additional four million borrowers are in “late-stage delinquency,” meaning they’re not making payments and are nearing the point when they’ll be considered in default.
Collections on student loan debt had previously been on pause since the COVID-19 pandemic began in March 2020, the agency said.
Debt collections will resume on May 5, when the Trump administration will restart the Treasury Offset Program that allows the government to withhold various federal payments—like tax refunds, federal salaries and Social Security payments—to those with federal debt.
The government will also start sending out notices “later this summer” informing borrowers who have defaulted about wage garnishment, in which the federal government can have up to 15% of borrowers’ salaries withheld to pay back their debts.
Crucial Quote
“Borrowers will now be expected to repay their loans, and those who don’t will face involuntary collections,” White House press secretary Karoline Leavitt told reporters Tuesday. “The government can and will collect federal student loan debt by withholding money from borrowers, tax refunds, federal pensions and even their wages.”
How Will Borrowers Know If They’ve Defaulted?
Borrowers who have defaulted on their debt will receive notices over the next two weeks urging them to take action on their debt before consequences are imposed.
Surprising Fact
Defaulting or being behind on federal student loan repayments is not uncommon, as the Education Department noted Monday that only 38% of borrowers are in repayment and are up to date on their student loan payments. Nearly 25% of all federal student loan borrowers could be in default in the coming months, the agency said Monday, should the millions of borrowers who are nearing default not start making payments.
What Federal Payments Are Withheld From Student Loan Borrowers In Default?
The Treasury Offset Program will withhold some federal payments from student loan borrowers who have defaulted on their loans starting May 5. The withheld funds will be used to help the federal government recover the amount the borrower owes for their student loans. Under that program, the government is allowed to withhold up to 100% of federal tax refunds, up to 15% of federal salaries, up to 15% of Social Security and Railroad Retirement benefits, up to 25% of federal retirement payments, 100% of payments to vendors and 100% of travel payments for federal employees. It could also affect up to 100% of some state payments, for states that have reciprocal agreements with the federal government.
What Is Wage Garnishment?
Wage garnishment is when the government orders a borrower’s employer to withhold up to 15% of their after-tax income in order to repay the government for the borrowers’ loan, which it can do without a court order. The wage garnishment will continue until either the loan is fully repaid or the borrower is no longer in default. The government is required to provide borrowers with at least 30 days notice before their wages start being withheld, and borrowers must be given an opportunity to either work out an agreement on repaying their loans or challenge the wage garnishment in a hearing before their income starts being withheld. Employees also can’t be fired or punished because of the wage garnishment. Borrowers can challenge their wage garnishment on several grounds, including if they’ve filed for bankruptcy and the loan was discharged, or if they’re disabled. They can also seek a ruling against the wage garnishment if withholding 15% of their income would pose an “extreme financial hardship,” though the National Consumer Law Center notes that’s typically only granted if borrowers can show a “significant and urgent” issue, like facing eviction or foreclosure.
Will Defaulting On Student Loan Payments Affect Borrowers’ Credit Score?
Yes. Not paying student loans, including missing payments and defaulting on them, harms borrowers’ credit scores. Defaulting on student loans will remain on a borrowers’ credit history for seven years after they default—meaning anyone checking a borrower’s credit would be able to see that they’ve defaulted—though after seven years they have to be deleted off the credit history, according to the Consumer Financial Protection Bureau.
What Are The Other Consequences Of Defaulting On Student Loans?
Defaulting on student loans can also have other consequences. Borrowers who are in default are no longer able to have their loans deferred or go into forbearance, and they cannot get any additional federal student aid, the Department of Education notes. Colleges may withhold transcripts from borrowers who have defaulted, according to the agency, and the Institute for College Access and Success notes defaulting on student loans can also result in borrowers having professional licenses or drivers’ licenses suspended.
Will Private Debt Collection Agencies Try To Collect Student Loan Borrowers’ Debt?
No. Private collection agencies are not involved with defaulted federal student loans, according to the Department of Education, so borrowers will only face debt collection efforts from the federal government directly.
What Can Student Loan Borrowers Do To Get Out Of Default?
Borrowers who have defaulted on their loans and want to avoid facing financial penalties can try to rehabilitate their loan, in which they have to make nine consecutive payments to their loan holder in order to get out of being in default. Borrowers can also consolidate their debt into a new Direct Consolidated Loan, at which point they’ll be taken out of default, or just pay the full amount they owe in one lump sum.
Key Background
The Trump administration has cracked down on providing relief to federal student loan borrowers, after the Biden administration took numerous steps to try and forgive Americans’ debt. In addition to keeping debt collections on pause, the Biden administration took piecemeal steps to provide targeted debt forgiveness to millions of borrowers, though its efforts to provide more sweeping debt forgiveness was ultimately struck down by the Supreme Court. The Trump administration has pulled back on those efforts, with Education Secretary Linda McMahon saying in a statement Monday, “American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies.” The move to restart debt collections for borrowers who have defaulted comes after the Trump administration has taken several other steps that have impacted student loan borrowers, including stopping—and then restarting—applications for income-driven repayment plans and President Donald Trump signing an executive order aiming to restrict the Public Service Loan Forgiveness program. The Trump administration is also dismantling the Department of Education, which has included making significant cuts to the agency’s workforce—including at the Office of Federal Student Aid—and working to move the federal student loan portfolio over to the Small Business Administration.
Further Reading
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