The US Department of Education is set to restart the collection of repayments on defaulted student loans soon.
On April 21, the department announced that its Office of Federal Student Aid (FSA) will resume collection efforts on its defaulted federal student loan portfolio.
Since March 2020, under the Trump administration, collections on default loans were halted due to the coronavirus pandemic, a measure which was extended multiple times by President Biden.
Starting May 5, approximately 1.8 million student loan borrowers will be transitioned into repayment plans, including those already in default.
For the over five million borrowers who are in default and unable to make payments when the department resumes collections, there will be significant repercussions.
In a Wall Street Journal op-ed, Education Secretary Linda McMahon criticized former President Biden for “dangling the carrot of loan forgiveness in front of young voters,” referencing the Education Department’s role in allowing students to accumulate debt that is overdue.
She pointed out: “Between 2021 and 2024, federal student-loan debt increased by more than $60 billion a year, while the department manipulated repayment plans and forgiveness policies until only 38 percent of the student-loan portfolio was in repayment. This is unsustainable for both students and taxpayers.”
McMahon announced the cessation of what she described as a “dishonest and irresponsible policy,” stating plans to align repayment options with federal court decisions and end the Biden-era zero-interest forbearances.
If borrowers are unable to fulfill their repayment obligations, they could see their credit scores affected negatively.
McMahon also noted, “And in some cases their wages automatically garnished.”
But how many people will actually be impacted?
A press release from the US Department of Education dated April 21 indicates that as of that time, “42.7 million borrowers owe more than $1.6 trillion in student debt.”
The release noted that “more than five million borrowers have not made a monthly payment in over 360 days and sit in default—many for more than seven years—and four million borrowers are in late-stage delinquency (91-180 days).”
The statement continues: “As a result, there could be almost 10 million borrowers in default in a few months. When this happens, almost 25 percent of the federal student loan portfolio will be in default.”
What are the consequences for those in default?
Defaulted borrowers will be contacted via email from the FSA in the coming weeks, informing them of these changes and encouraging them to reach out to the Default Resolution Group.
These borrowers can choose from several options: making a monthly payment, enrolling in an income-driven repayment plan, or signing up for loan rehabilitation.
Later in the summer, FSA plans to start administrative wage garnishment by sending out the necessary notices.
The FSA aims to collaborate with its partners—states, institutions of higher education, financial aid administrators, college access organizations, third-party servicers, and other stakeholders—to promote the message that it is the responsibility of student and parent borrowers, not taxpayers, to repay their student loans. There will not be any large-scale loan forgiveness, and these steps are intended to return the federal student loan portfolio to active repayment, which will benefit both borrowers and taxpayers.