Impending Collection Actions for Defaulted Student Loans: Key Information for Borrowers

Starting next month, the U.S. Department of Education will initiate collection actions against approximately 5.3 million borrowers whose federal student loans are currently in default. This decision marks a significant shift as collection referrals had been suspended since March 2020 due to the COVID-19 pandemic, during which the federal government also implemented a temporary halt on student loan payments and interest accrual.

These measures were extended multiple times under the Biden administration, but the grace period officially concluded in October 2024. As a result, borrowers like Kat Hanchon, who works in higher education information technology in Michigan, are now facing the prospect of wage garnishment and other severe consequences. Hanchon, 33, expressed her distress upon learning the news, highlighting the financial strain of managing nearly $85,000 in educational debt alongside other living expenses.

According to the Education Department, notifications regarding the upcoming collection efforts will be sent out soon. Borrowers in default will need to be aware of the involuntary collection process starting on May 5, which will be conducted through the Treasury Department's offset program. This means that the government can garnish wages, intercept tax refunds, and seize portions of Social Security checks and other benefits to recover outstanding loan amounts.

To clarify the terminology, a student loan becomes delinquent when a borrower fails to make a payment 90 days after its due date. If the delinquency continues for 270 days, the loan is classified as being in default. While delinquency negatively impacts credit scores, default can lead to more severe repercussions, including wage garnishment.

For those in default, the Department of Education recommends visiting its Default Resolution Group for assistance. Options available to borrowers include making monthly payments, enrolling in an income-driven repayment plan, or participating in loan rehabilitation. Experts suggest that loan rehabilitation, which requires borrowers to ask their loan servicer to enter such a program, can be a viable solution. After making timely payments for nine consecutive months, borrowers can exit default status. However, it is important to note that this rehabilitation can only be pursued once.

Borrowers experiencing financial difficulties may also consider applying for forbearance, which temporarily pauses student loan payments. However, it is crucial to understand that forbearance is not available for loans already in default; it is only an option for those who are delinquent.

To check the status of their student loans, borrowers should access their studentaid.gov accounts. The Education Department will send notifications about involuntary collections via email, so it is essential for borrowers to ensure that their personal information is current.

It is important to note that involuntary collections may also affect Supplemental Security Income (SSI), as benefits from Social Security are classified as income. Furthermore, delinquency on student loans can significantly lower credit scores, potentially dropping them by 100 points or more. Negative credit history can stay on a borrower's report for up to seven years, which can hinder access to credit cards, housing loans, and rental agreements.

Lastly, applications for income-driven repayment plans are currently open, allowing borrowers to adjust their monthly payments based on income level and family size. However, the SAVE program, which was previously available, is no longer accepting applications due to ongoing legal challenges. Current participants in the SAVE program are in administrative forbearance and do not need to make payments at this time.