Trump Administration Resumes Student Debt Collections for Millions of Borrowers in Default

After a five-year hiatus, the Department of Education is resuming the collections process on millions of borrowers who have defaulted on their federal student loans.

Borrowers who are in default are at least 270 days, or about nine months, behind on their federal student loan payments, and the status typically comes with harsh financial consequences. Chief among them is the involuntary garnishment of wages and federal benefits, a process that is starting again Monday.

“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” said Education Secretary Linda McMahon in a statement last month, referring to programs enacted by former President Joe Biden that sought to reform the student loan repayment system.

The financial penalties for falling behind on student loan payments were largely blunted after the onset of the COVID-19 crisis, but that leniency is over. Forced collections from defaulted borrowers is the last major step in returning the loan repayment system to its pre-pandemic rules. It follows a year-long on-ramp aimed at easing borrowers back into repayment that ended last fall. Before that transition period, payments were entirely paused for three-and-a-half years.

Now, more than 5 million borrowers are in default, according to the Education Department, but that number is set to double in the coming months as borrowers struggle to resume payments after years of not making them. Only 38% of borrowers are current on their loans, the department said.

The share of borrowers who are seriously delinquent has soared since payments resumed, hitting a new record high, according to a TransUnion report released Monday. About 20% of borrowers in repayment had loans that are at least 90 days past due in February. That's up from 11.5% in February 2020.

Advocates of student loan borrowers decried the decision to restart collections given that the Education Department is in disarray following layoffs of more than 1,300 department workers last month even as the Trump administration has said it wants to overhaul some student loan repayment plans.

The advocacy group Student Borrower Protection Center (SBPC) said that the Trump administration is throwing millions of borrowers “into the maw of government debt collection machine.”

“This is cruel, unnecessary, and will further fan the flames of economic chaos for working families across this country,” Mike Pierce, executive director of SBPC, said in an emailed statement when the policy was announced.

Millions of student loan borrowers are already feeling the financial effects of running behind on their loan bills even before collections kick in.

In February alone, 2.7 million borrowers became delinquent, tanking their credit scores by up to 171 points, according to credit scoring firm FICO. Student loan delinquencies are so widespread that the nation’s average credit score fell by one point to 715 that month, the firm found.

What to expect as student loan collections resume

The consequences of defaulting on student loans are wide-ranging and long-lasting.

Even before you default, a delinquent loan will likely have a major, negative effect on your credit score. But once the loan payment is about nine months late, more severe consequences kick in.

For starters, you become ineligible for many federal student loan programs, including forbearance and deferment periods in which you’re exempt from payments. You also lose the ability to choose an income-driven repayment (IDR) plan, and you'll lose eligibility for new Pell grants and federal loans.

The default is reported to the credit bureaus, hurting your score even more than a delinquent loan. That black mark can make it nearly impossible to buy or sell any assets or property.

Perhaps worst of all is that the federal government can garnish your income, including wages from your job(s) as well as federal payments, such as Social Security checks and tax refunds.

The Education Department said it would email borrowers in default before Monday. If you didn't receive an email and you're unsure of your loan status, you should log into studentaid.gov to check.

The first collections activity will be through the Treasury Offset Program, through which the government can withhold entire federal tax refunds, up to 15% of Social Security payments and up to 15% of a federal worker’s disposable pay. Later this summer, the government will begin sending out wage garnishment notices to non-federal employees.

If you do have a loan in default, you can visit myeddebt.ed.gov to review your options. Ultimately, to get your loan back in good standing, you will need to complete a loan rehabilitation or consolidation program through the Education Department, which may take up to 10 months.

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