The hammer is coming down on federal student loan borrowers who haven't been making payments.
The Department of Education on Monday announced it would resume "involuntary" collections for federal borrowers with defaulted loans on May 5. President Donald Trump first put a pause on collections activity for federal student loans in March 2020. The pause continued under President Joe Biden.
Borrowers with direct federal loans who don't make a payment on their loans or arrangements for a forbearance or deferment for at least 270 days past their first missed due date are considered in default.
At least 5 million borrowers currently have loans in default, ED says, and another 4 million are in "late stage delinquency," meaning their loans are between 90 and 180 days past due. Together, these groups could bring the total number of borrowers in default close to 10 million in the coming weeks, ED says.
"American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies," Secretary of Education Linda McMahon said in a statement.
There has been a lot of back and forth around when borrowers have to make student loan payments, what repayment plan options are available and whether any of their debt can or will be forgiven in the last few years. But ED is attempting to send a clear message to borrowers: Pay or face the consequences.
"Borrowers who don't make payments on time will see their credit scores go down, and in some cases their wages automatically garnished," McMahon wrote in an op-ed for The Wall Street Journal.
Here's how you can avoid the worst outcomes if you can't make your student loan payments and what to expect if you're already in default.
If you're behind on payments, 'do everything you can' to avoid default
For the 4 million borrowers in late-stage delinquency and others who may have just started missing monthly payments, your objective should be to avoid defaulting on those loans at all costs, says Bruce McClary, a senior vice president at the National Foundation for Credit Counseling.
"It's really about trying to do everything that you can to find alternatives to default that keep you out of that area," he says. "Because once you go into default, yes, your wages can be garnished. Tax refunds can be seized, you'll have difficulty qualifying for federally guaranteed loans of any kind, which can include [Federal Housing Administration] mortgages and other other things."
If you haven't yet defaulted, but can't afford your monthly payments, you can explore income-driven repayment options. The three payment plans available — income-based repayment, income-contingent repayment and the Pay As You Earn plan — allow borrowers to have a monthly payment set as a portion of their disposable income.
If none of those options work for you, McClary says to reach out to your loan servicer directly and see what alternatives may be available.
"It's their job to collect the loans and to collect payments and see what options they may be able to help you come up with," he says.
Options for borrowers already in default
When you default on your loans, the entire balance comes due immediately. If you can't pay, your wages may be garnished, starting with government-issued payments like your state and federal tax refunds and benefits like Social Security income.
The Department of Education will notify you 65 days prior to beginning "offset," which is the process of withholding your government payments to satisfy your debt. You must take one of the following actions within those 65 days to avoid offset:
- Enter a repayment agreement, which can be determined "based on your specific financial situation," according to ED, and make the first payment within 65 days. This option keeps your loans in default, however.
- Rehabilitate your loan. Similarly, this is a payment plan negotiated between you and your loan servicer that requires you to make nine on-time monthly payments to get your loans out of default. These payments can be as low as $5 a month, ED says.
- Consolidate your loans into a Direct Consolidation Loan. This will pay off the defaulted loans and give you a new loan. You must submit an application within 65 days to avoid offset.
- Pay the debt in full, which will allow you to avoid offset and negative credit reporting.
- Make a valid objection by arguing reasons such as you don't owe the debt, aren't behind on payments or are totally and permanently disabled. You can do this by filling out the Request for Review form that should arrive with the notice of intent to offset.
After offset, the government may look to your regular income to remedy your defaulted loans through wage garnishment. Unlike private lenders and credit card companies, the federal government does not have to take you to court to be able to garnish your wages when you've defaulted on your loans, McClary says.
ED must notify you at least 30 days prior that your wages are going to be garnished. There is a limit: Your loan servicer can only take up to 15% of your disposable pay, which is your income after mandatory deductions like taxes but before voluntary deductions like your 401(k) contributions or health insurance premiums, McClary says.
This may impact your ability to cover more immediate needs, such as rent or groceries, so you'll want to avoid this outcome to the best of your ability.
Similar to offset, you can remedy wage garnishment by negotiating a voluntary repayment schedule with your loan holder and making the first payment within 30 days of the garnishment notice.
You may also request a hearing to make the case against wage garnishment if it would put you in extreme financial hardship, you do not actually owe the debt or you have been employed for less than a year after an involuntary separation from your previous employer.
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