The Trump administration has announced that it will soon resume collections on defaulted student loans for the first time in five years, instilling concern and anxiety among millions of borrowers nationwide. The Department of Education revealed on Monday that its Federal Student Aid office will restart these collections on May 5. This means that the government can begin deducting funds from borrowers' tax refunds, Social Security benefits, and eventually, their wages. Education Secretary Linda McMahon stated that this initiative is designed to transition the federal student loan portfolio back into repayment, benefiting both borrowers and taxpayers alike.
This significant change will impact approximately 5.3 million borrowers who fell into default prior to the pandemic, according to the Education Department. A borrower is considered in default when they fail to make a loan payment for at least 270 days. Additionally, many more borrowers are currently delinquent on their payments and may be on the verge of default. Data shared with NPR indicates that 2.9 million borrowers are 61-90 days late on their payments, while another 4 million are in late-stage delinquency and have been reported to credit bureaus, quickly approaching default.
Experts caution that while most borrowers may not currently be at risk of delinquency, they could find themselves in jeopardy within the next five months. Scott Buchanan, executive director of the Student Loan Servicing Alliance, emphasized the urgency for borrowers to take action now. The Education Department has announced plans to send notices regarding wage garnishment, which can seize up to 15% of a borrower's disposable income, later this summer. In the meantime, borrowers in default are strongly encouraged to start making monthly payments or enroll in an income-driven repayment plan.
The decision to restart collections comes after nearly 8 million federal student loan borrowers were in default at the onset of the pandemic. In March 2020, the Trump administration paused collections for at least 60 days due to the economic downturn. During this time, no borrowers faced credit damage, wage garnishments, or cessation of public benefits, creating a five-year hiatus from standard collection practices. The Biden administration, while attempting to implement broad student loan forgiveness, extended the pause on federal student loan payments until October 2023. However, the resumption of collections is now a reality.
Betsy Mayotte, president of the Institute of Student Loan Advisors (TISLA), noted that the return of loan collections was anticipated and reflects the restoration of previous policies rather than new regulations. The Department of Education is required to collect on these debts, as they are owed to the U.S. taxpayer. Importantly, there will be no mass loan forgiveness, as emphasized by the administration.
The Department of Education has committed to reaching out to all borrowers in default before May 5, using emails and social media to remind them of their obligations. Borrowers can check their status by logging into StudentAid.gov, where they can view their total debt, monthly payment amounts, and any default warnings. Student loan servicers, like MOHELA and Aidvantage, can also provide insights into a borrower's status. If borrowers are receiving bills from their student loan servicer, it indicates they are not in default and will not face forced collections.
For those who find themselves in default, there are three primary options to regain good standing. The quickest, though most challenging, is to repay the loans in full. For many borrowers, this is not a feasible option. The two more viable methods include loan consolidation and rehabilitation. Loan consolidation allows borrowers to pay off their defaulted loans under new repayment terms, making them eligible for lower payment options. Rehabilitation requires borrowers to make a set number of consecutive on-time payments, after which the loan is removed from default status and the default record is erased from their credit report.
As the Department of Education faces significant staffing reductions amid the Trump administration's federal layoffs, navigating student loans may become increasingly challenging for borrowers. Many have reported long wait times when contacting their usual resources. Mayotte highlights that alternative support, including advocates and ombudsmen in certain states, as well as information from nonprofits online, is available. Buchanan advises borrowers to utilize the loan calculator on the federal student aid website to estimate their monthly payments under various repayment plans and to select the best fit for their financial situation.
Overall, it is crucial for borrowers to be proactive and informed about their options as collections resume. The federal student loan program offers a range of flexible repayment options, and borrowers are encouraged to take full advantage of these benefits.
