Student Loan Collections Restarting May 5—Here’s What to Know

The Department of Education will resume collections on May 5 for federal student loans in default for the first time in five years, impacting some 5 million borrowers.

Since March 2020, the department has not collected on default loans. When Congress mandated student and parent borrowers to resume student loan payments in October 2023, the previous administration granted borrowers another year to be protected from the negative effects of missed payments. Former President Joe Biden also did not lift the collections freeze.

This will now change beginning next month,Secretary of Education Linda McMahon said on April 21.

“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” McMahon said in a statement. “The Biden Administration misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear.”

According to the Department of Education, 42.7 million borrowers currently owe more than $1.6 trillion in student loan debt.

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All borrowers may already have received, or will soon receive, email communications from the Office of Federal Student Aid requesting that they contact the Default Resolution Group to enroll in an income-driven repayment plan, sign up for loan rehabilitation, or make a monthly payment.

The department confirmed that it will add weekend hours to the Office of Federal Student Aid’s call center operations next month. It will also create a “loan simulator” to calculate repayment plans and employ an artificial intelligence assistant to help borrowers devise a financial strategy.

A defaulted loan is a loan for which borrowers have not made payments for 270 days or more.

Wage Garnishment

Borrowers who remain in default could eventually see their earnings garnished.

The federal government possesses enormous collection powers over federal debts, allowing officials to seize up to 15 percent of borrowers’ disposable income.

In a press release, the Department of Education said it will send notices regarding administration wage garnishment later this summer.

“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 a Wall Street Journal op-ed last week.

In March, Federal Reserve Bank of New York economists stated that more than 9 million student loan borrowers who are late on their payments could face “significant drops” in their credit scores this year.

They estimate that some borrowers could witness their credit scores decline by as much as 171 points.

First, repay the loans in full.

Second, loan consolidation allows borrowers to repay their defaulted loans with new repayment terms.

Finally, loan rehabilitation ensures borrowers take the loan out of default and remove the default line from their credit reports. However, there is a caveat: individuals must make multiple consecutive on-time payments of a pre-arranged amount.

Protecting Taxpayers

Why is the Trump administration restarting federal student loan collections?

U.S. officials have stated that the former president did not have the authority to forgive student loans; it is also necessary to protect taxpayers from shouldering the costs of loans that students accepted.

“Debt doesn’t go away; it gets transferred to others,” McMahon wrote. “If borrowers don’t pay their debts to the government, taxpayers do.”

Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, agrees with the department’s actions.

“The administration is taking the right approach by restarting repayments in earnest and conducting a creative and aggressive outreach strategy to make sure borrowers understand their obligations.”

Mike Pierce, the executive director of the Student Borrower Protection Center, said the new effort is “cruel, unnecessary, and will further fan the flames of economic chaos for working families across this country.”

If this occurs, about a quarter of the federal student loan portfolio will be in default.

“Only 38 percent of borrowers are in repayment and current on their student loans,” the department said. “Most of the remaining borrowers are either delinquent on their payments, in an interest-free forbearance, or in an interest-free deferment. A small percentage of borrowers are in a 6-month grace period or in-school.”