- Federal student loan collections will resume May 5ending a five-year pause that began in March 2020.
- Borrowers in default will face wage garnishment and tax refund offsets if they don’t take action to resolve their loans.
- The Department of Education is launching a nationwide outreach effort to alert borrowers and offer tools to help them return to repayment.
The Department of Education will restart collections on defaulted federal student loans beginning May 5, ending a pause that has been in place since the start of the pandemic. Borrowers who have not taken steps to resolve their loans may face wage garnishment or see their tax refunds seized under the Treasury Offset Program.
Roughly 5 million borrowers are already in default. The Department estimates that without intervention, up to 10 million could be in default by this summer.
Restarting collections is part of a broader push to get the federal student loan system back on track, but the Department also mentioned “protecting the responsible taxpayer” in their statement.
Renewed Collection Efforts For Student Loans
Borrowers who have been in default for over a year are the primary focus of the Department’s action. Those affected will receive official communications beginning this week, urging them to contact the Default Resolution Group.
Options for avoiding collections include:
- Enrolling in an income-driven repayment (IDR) plan
- Entering into loan rehabilitation
- Making a voluntary payment
If borrowers fail to act, automatic wage garnishment and tax refund seizures could begin as early as summer. Guaranty agencies managing older FFEL loans will also resume collection efforts under federal authorization.
Related: Strategic Default On Student Loans Is A Bad Idea
What Type Of Collection Activities Could Borrowers Face?
The federal government has very strong powers to collect defaulted federal student loans. They will get their money, one way or another, and the borrower will end up paying the penalty. Here are some of the tools the government has at its disposal.
- The federal government can garnish up to 15% of a defaulted borrower’s wages administratively, without a court order. The wage garnishment exceeds the amount a borrower would have paid under an income-driven repayment plan.
- The federal government can offset federal income tax refunds and up to 15% of Social Security disability and retirement benefits.
- Collection charges of up to 20% may be deducted from every payment, slowing the repayment trajectory.
- The federal government can prevent renewal of professional licenses (including driver’s licenses in some states, not just the licenses of doctors, nurses, dentists, pharmacists, social workers, teachers, accountants and attorneys).
- The borrower will be ineligible for FHA and VA mortgages, can’t enlist in the U.S. Armed Forces, and will lose eligibility for further federal student aid.
- The federal government (and private attorneys acting on behalf of the federal government) can sue defaulted borrowers to collect the debt. With a court judgment against the borrower, they can garnish a greater amount, place liens on the borrower’s property and get a levy to seize money from the borrower’s bank and brokerage accounts.
- The federal government can also seize the borrower’s lottery winnings.
- The federal government will report the delinquencies and defaults to credit bureaus, making it very difficult for the borrower to get any credit (or, in some cases, to rent an apartment or get a job).
- Federal student loans are almost impossible to discharge in bankruptcy, so this debt will never go away.
The bottom line is that student loan default can be very costly. Borrowers will also see their credit scores drop, which could increase costs in other areas – such as housing, insurance, and more.
Next Steps
The Department will launch a large-scale communications push over the coming weeks – hopefully to reduce confusion and increase enrollment in affordable repayment plans. This will include emails, social media messaging, and updates on StudentAid.gov.
The Department is asking colleges, state agencies, and financial aid offices to help spread the message. While past messaging has focused on temporary relief, officials say this next phase is about accountability and resolution.
Regardless, all student loan borrowers need to check in with their student loan servicers, ensure they understand if their loans are current or in default, and take appropriate action.
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