Student Loan Debt Collection Begins Soon
On May 5, the Trump Administration will continue collecting on defaulted student loans for the first time in about five years. Collections were paused in 2020 due to the COVID-19 pandemic. They were not restarted following the pandemic’s conclusion to offer further relief to those most impacted by the pandemic. Congress had mandated that student and parent borrowers begin to repay their loans in October 2023. However, the Biden-Harris Administration did not lift the collections pause, leaving many in a confusing limbo. However, under the current administration, that reprieve has been suspended; this change will impact about 5.3 million borrowers who went into loan default before and during the pandemic, according to the Department of Education.
The Trump Administration, which is very opposed to the Biden-Harris era campaign promise of broad-based student loan forgiveness, says these steps are being taken to relieve the burden on American taxpayers. This sentiment is echoed by the ED itself: “American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” said United States Secretary of Education Linda McMahon. The Trump Administration has stated that it seeks to protect responsible taxpayers and keep them off the hook for irresponsible lending practices that were furthered in the past few years, which has only led further to the federal student loan portfolio heading towards fiscal ruin. Today, 42.7 million borrowers owe over $1.6 trillion in student debt. In a few months, almost 25 percent of federal student loans will be in default.
A borrower is considered ‘in default’ if they fail to make a loan payment for at least 270 days. In addition to the 5.3 million already in default, according to data from the ED, it is likely that about 2.9 million are headed that way, with many being 61-90 days late and getting closer and closer to that 270-day mark. The ED has said it will reach out to all borrowers potentially facing default prior to May 5 via email and social media posts. They plan to do this to remind them and offer support in selecting the best repayment plan. That said, with the current major downsizing of the department, many are concerned with how effective this support will be. Many are foreseeing, if not already seeing, major delays in loan servicers as employment was so heavily slashed, leading to long wait times and frustrated borrowers.
The resumption of collections also means that the office of Federal Student Aid at the Department of Education will, after May 5, be able to take funds out of borrowers’ tax refunds, Social Security benefits, and even wages somewhere down the line. This is concerning, given today’s already uneasy economy, and some goods being more expensive; the threat of their Social Security and even wages taking a hit is causing some worry for those most impacted.
Loan repayment plans have been offered as one solution, but the ED’s Office of Federal Student Aid (FSA) has also stated that it will restart the Treasury Offset Program, administered by the U.S. Department of the Treasury. Later this summer, the FSA has stated that after offering and urging people in default to begin to make monthly payments, they will begin administrative wage garnishment. Involuntary collections on loans will also be allowed to continue under the Federal Family Education Loan Program. These, just as mentioned above, will start less impactful, such as those who don’t make their payments on time, seeing their credit scores go down. However, as the payment is not made for an extended period, that is when their wages will likely begin to take a hit.
All this said, the FSA remains committed to keeping borrowers updated with clear information about their options and continuing to help them along a productive path to repaying their federal loans. The FSA plans to also enlist the help of states, institutions of higher education, financial aid administrators, college access and success organizations, third-party servicers and other stakeholders to help them “restore commonsense and fairness with the message: student and parent borrowers – not taxpayers – must repay their student loans,” according to the Office of Communications and Outreach at the Department of Education. The Trump Administration hopes to create a system that will benefit borrowers and taxpayers alike.