U.S. Resumes Student Loan Collections, 5.3 Million Borrowers Face Garnishment

The U.S. Department of Education has announced that starting next month, defaulted student loans will be turned over to collection agencies. Approximately 5.3 million borrowers with federal student loans are currently in default and may soon face wage garnishment.

Due to the COVID-19 pandemic, the transfer of collection procedures has been suspended since March 2020. At that time, the U.S. government also temporarily paused federal student loan repayments and interest accrual as part of a relief measure. This forbearance period was extended multiple times by the Biden administration and ended in October of last year.

The Department of Education stated that notifications regarding collection actions will soon be sent out, but borrowers also have options to escape default status. Here are some key points to understand:

Non-voluntary collection will begin on May 5th through the U.S. Department of the Treasury's offset program. According to the Department of Education, defaulted student loan borrowers will receive notifications from the Federal Student Aid Office in the coming weeks, which will include information about their available options.

Non-voluntary collection means the government can garnish wages, intercept tax refunds, and seize portions of Social Security checks and other benefit payments to repay the loan.

There is a distinction between delinquency and default in student loans. A loan is considered delinquent when a borrower fails to make a payment within 90 days of the due date. If the borrower continues to miss payments for 270 days (approximately nine months), the loan enters default status. While delinquency affects a borrower's credit score, default has more severe consequences, such as wage garnishment.

When a loan defaults, it appears on the borrower's credit report after 270 days of non-payment. Once a loan defaults, the borrower is turned over to a collection agency by the government.

If a borrower's student loan is already in default, there are steps they can take. The Department of Education recommends that borrowers visit their default resolution group to make monthly payments, enroll in an income-driven repayment plan, or sign up for a loan rehabilitation program.

Betsy Mayotte, president of the Student Loan Advisors Association, recommends choosing the loan rehabilitation program. Defaulted borrowers must apply to their loan servicer to join the program. Typically, the servicer will require proof of income and expenses to calculate the repayment amount. Mayotte stated that once a borrower makes nine consecutive on-time payments, they can escape default status. The loan rehabilitation program can only be used once.

Student loan forbearance is a temporary pause on repaying student loans for borrowers facing economic hardship. To apply for forbearance, borrowers must contact their loan servicer. Loan servicers can grant up to 12 months of forbearance, but interest will continue to accrue during this period.