Starting next month, the U.S. Department of Education plans to start referring federal student loans that are in default for collection. This decision could impact approximately 5.3 million borrowers, potentially resulting in their wages being garnished. This shift marks the end of a pause on collection referrals that began in March 2020 during the onset of the COVID-19 pandemic when the federal government temporarily suspended student loan payments and halted interest accumulation. This relief measure was extended several times under the Biden administration before concluding in October.
One person affected by this development is Kat Hanchon, a 33-year-old higher education IT worker in Michigan. Hanchon shared their distress upon learning about the news, expressing how it made them feel physically ill given that they already struggle to manage living expenses on a paycheck-to-paycheck basis. Hanchon currently owes nearly $85,000 from their undergraduate and master’s studies and notes that, despite being on an income-driven repayment plan, the burden of their debt combined with other expenses, like a mortgage and medical bills, remains unmanageable. The last time Hanchon was able to make a student loan payment was September 2024, recalling that even a monthly charge of $55 was too steep for their tight budget.
To address these imminent changes, the Education Department plans to send out notifications regarding collection efforts while highlighting that there are options available for borrowers to exit default statuses.
Beginning on May 5, the department will reinstate involuntary collection through the Treasury Department’s offset program. This means that the government will have the authority to seize portions of borrowers’ wages, tax refunds, and even Social Security checks to recoup the loans. Borrowers with loans in default should expect communication from Federal Student Aid in the coming weeks outlining their potential options.
It’s important to distinguish between loans that are delinquent versus those in default. A loan is considered delinquent when a payment is overdue by 90 days; however, if this situation continues for 270 days, the loan is categorized as being in default. While being delinquent already harms a credit score, defaulting results in more severe actions, such as wage garnishment.
When a borrower’s loan defaults, it is then recorded as such on credit reports, prompting the government to initiate collection efforts. However, there are steps a borrower can take if their loan is in default. The Education Department advises borrowers to use the Default Resolution Group to arrange for payments, join an income-driven repayment plan, or pursue loan rehabilitation. Betsy Mayotte, president of The Institute for Student Loan Advisors, recommends loan rehabilitation, which requires consistent on-time payments over nine months to emerge from default, although each loan can only undergo rehabilitation once.
For borrowers seeking alternatives to manage their loan payments, forbearance might still be an option. This is a temporary postponement granted to those undergoing financial difficulties, allowing payment deferral for up to a year; however, interest will continue to accrue during this time. It should be noted that forbearance isn’t available for loans already in default, but rather for those that are still delinquent.
Awareness of one’s student loan status is crucial, emphasized by Kate Wood, a student loan expert. To verify their loan status and identify their loan servicer, borrowers should access their studentaid.gov accounts. Maintaining updated contact details—including email and physical address—is equally important due to upcoming email notifications concerning involuntary collections.
Should involuntary collections commence, they could also target Supplemental Security Income as Social Security benefits are classified as income. Borrowers experiencing delinquency can incur significant declines in their credit scores—potentially by 100 points or more. Such negative marks typically remain on credit reports for seven years, affecting financial options like obtaining credit cards, purchasing homes, or renting apartments.
Borrowers can explore applying for income-driven repayment plans, which adjust monthly payments based on income and family size. While the Biden administration’s SAVE program is currently paused due to legal challenges, those already enrolled remain in administrative forbearance, meaning they are temporarily exempt from making payments. To explore various income-driven repayment plans, borrowers can use the loan simulator tool available on studentaid.gov.