The Department of Education announced Monday that it will restart collections on May 5 for student loans in default.
If borrowers do not take action to begin a repayment plan, they can see a portion of their wages garnished.
All collections on student loans in default had been paused in March 2020 in response to the COVID-19 pandemic, with many businesses forced to close during mandatory lockdowns.
“While Congress mandated that student and parent borrowers begin to repay their student loans in October 2023, the Biden-Harris Administration refused to lift the collections pause and kept borrowers in a confusing limbo,” the DOE said in a Monday news release.
“Resuming collections protects taxpayers from shouldering the cost of federal student loans that borrowers willingly undertook to finance their postsecondary education. This initiative will be paired with a comprehensive communications and outreach campaign to ensure borrowers understand how to return to repayment or get out of default,” the department added.
Altogether, 42.7 million borrowers owe $1.6 trillion to the federal government.
Of these, “More than 5 million borrowers have not made a monthly payment in over 360 days and sit in default — many for more than 7 years — and 4 million borrowers are in late-stage delinquency (91-180 days). As a result, there could be almost 10 million borrowers in default in a few months.”
The Federal Student Aid office explained on its website that missing a single loan repayment makes a borrower delinquent.
“If you are delinquent on your student loan payment for 90 days or more, your loan servicer will report the delinquency to the national credit bureaus, which can negatively impact your credit rating,” the agency noted.
Going longer than 90 days risks the loan going into default, which will have far more serious consequences.
First, the entire unpaid balance on the loan becomes immediately due.
The Treasury Department can then withhold the borrower’s tax refunds, as well as garnish wages, to apply toward the outstanding balance.
“This means your employer may be required to withhold a portion of your pay and send it to your loan holder to repay your defaulted loan,” the Federal Student Aid office said.
Further, having a loan in default may impact the borrower’s credit rating to the point that he or she will not be able to obtain a mortgage or a car loan or get a credit card.
The aid office encouraged those who are in default to contact their loan servicer to work out a repayment plan.
Betsy Mayotte, president and founder of the Institute of Student Loan Advisors, told The Washington Post that debt rehabilitation will likely be a good option for many.
After nine on-time payments, the loan comes out of default as if it never occurred, in terms of the credit rating, she noted. However, delinquencies leading up to the default will remain on the credit report for the usual time, which can be up to seven years from the infraction.
Education Secretary Linda McMahon said in a Monday statement, “American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies.”
“The Biden Administration misled borrowers: The executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear. Hundreds of billions have already been transferred to taxpayers,” she continued.
“Going forward, the Department of Education, in conjunction with the Department of Treasury, will shepherd the student loan program responsibly and according to the law, which means helping borrowers return to repayment — both for the sake of their own financial health and our nation’s economic outlook.”
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