Education Department to Resume Collection of Defaulted Student Loans

In a significant policy shift, the U.S. Department of Education has announced it will begin the collection process for federal student loans that are currently in default starting next month. This decision affects approximately 5.3 million borrowers who have fallen behind on their loan payments. The collection efforts will include measures such as wage garnishment, a move expected to impact millions.

This decision marks the conclusion of a suspension period that began in March 2020 during the COVID-19 pandemic, when federal student loans were not referred for collection. The Trump administration's temporary relief was extended through multiple measures under the Biden administration, which sought to implement broader student loan forgiveness initiatives. However, many of these efforts were halted by legal challenges.

Education Secretary Linda McMahon emphasized that taxpayers should not bear the burden of ineffective student loan policies. Starting May 5, the department will initiate involuntary collections via the Treasury Department's offset program. This program allows the government to withhold payments, including tax refunds and federal salaries, from individuals with overdue debts. Following a 30-day notification period, the department will also begin garnishing wages for those in default.

The decision to resume collections has drawn criticism from various advocacy groups, who argue that borrowers have faced confusion due to the shifting policies between administrations. Critics assert that the current approach is both harsh and unnecessary, potentially exacerbating economic difficulties for struggling families.

Many borrowers had been preparing for the return of payment obligations after a prolonged period of relief. The initial pause on federal student loan payments and interest accumulation was enacted in 2020 and extended multiple times by the Biden administration until the final grace period concluded in October 2024. Consequently, borrowers who fail to make payments for nine months will be reported as in default, negatively impacting their credit scores and exposing them to collections.

In addition to the 5.3 million borrowers in default, around 4 million more are reported to be between 91 to 180 days late on their payments. Data indicates that less than 40% of all borrowers are currently making timely payments on their loans.

Moreover, recent layoffs within the Federal Student Aid office have hindered the ability of borrowers to get timely answers to their inquiries, even when they are willing to repay their loans. There is also significant uncertainty surrounding various income-driven repayment programs, especially following a court ruling in February that blocked some of these plans. Borrowers enrolled in the more flexible SAVE Plan have been placed in forbearance, where they are not required to make payments but continue to accrue interest.

As the repayment landscape continues to evolve, experts caution that many borrowers may find themselves in default not due to a lack of willingness to pay, but rather an inability to do so amid changing regulations and policies.

For those in default, one potential avenue to prevent wage garnishment is through loan rehabilitation. Borrowers can request their loan servicer to enter them into a rehabilitation program, which typically requires proof of income and expenses to determine a feasible payment amount. Successfully making timely payments for nine consecutive months can lead to the removal of the default status, although this process can only be utilized once.

Despite challenges, the Biden administration has successfully canceled student loans for over 5 million borrowers, waiving more than $183.6 billion through expanded forgiveness programs. However, the administration's broader proposals for student debt relief have faced significant legal hurdles.

In light of the recent announcement, the Education Secretary has indicated that moving forward, the Department of Education, in collaboration with the Department of Treasury, aims to manage the student loan program in a manner that aligns with legal requirements, prioritizing the financial health of borrowers and the nation's economic stability.