The Department of Education is set to resume collections activities against defaulted federal student loan borrowers on Monday. The collections system had been largely suspended for more than five years, largely due to pandemic-era relief programs. But those programs have now expired, and the Trump administration signaled last month that efforts to forcibly collect from defaulted federal student loan borrowers will quickly ramp up.
“The Department has not collected on defaulted loans since March 2020,” said a department announcement last month. “Resuming collections protects taxpayers from shouldering the cost of federal student loans that borrowers willingly undertook to finance their postsecondary education.”
“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” said U.S. Secretary of Education Linda McMahon in a statement last month accompanying the announcement. “Going forward, the Department of Education, in conjunction with the Department of Treasury, will shepherd the student loan program responsibly and according to the law, which means helping borrowers return to repayment—both for the sake of their own financial health and our nation’s economic outlook.”
The collections activities will commence this week with the resumption of the Treasury Offset program. Treasury Offset authorizes the government to intercept federal tax refunds, garnish Social Security payments, and offset other federal income streams, including federal salaries. Administrative wage garnishment, which allows the government to seize a portion of a borrower’s employment income from private and public employers, will resume later this summer.
Federal student loan collections actions can have significant financial ramifications for student loan borrowers. Here’s how to protect yourself.
Find Out If You Have A Defaulted Federal Student Loan
Only federal student loans that are in a default status can be subject to Treasury Offset and administrative wage garnishment. “Default” is a term that has a specific definition under federal law for Direct and FFEL-program loans: the loan must be past due by at least 270 days (roughly the equivalent of nine months) to be in default.
“For a loan made under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program, you’re considered to be in default if you don’t make your scheduled student loan payments for at least 270 days,” says Department of Education guidance.
If you are in regular repayment on your student loans under an approved repayment plan, you are not in default. In addition, certain periods of non-payment (such as a deferment, a forbearance, or a grace period) do not constitute default, even though no payments are being made.
To verify whether you have a defaulted federal student loan, log into your account at StudentAid.gov. Your account dashboard will summarize your outstanding federal student loans and should alert you if you have any accounts that are in default.
Avoid Defaulting On A Federal Student Loan By Curing Delinquency
If you have fallen behind on your federal student loans, that’s not ideal. Missing payments on a student loan is known as “delinquency,” and can lead to late fees and negative credit reporting. But there may still be time to avert default, cure the delinquency, and bring your account back to good standing again.
“The first day after you miss a student loan payment, your loan becomes past due, or delinquent,” says Department of Education guidance. “If you are delinquent on your student loan payment for 90 days or more, your loan servicer will report the delinquency to the national credit bureaus, which can negatively impact your credit rating. If you continue to be delinquent, you risk your loan going into default.”
If you are less than 270 days past due on a federal student loan, there may be time to avert default. You can pay the past due balance, or you can contact your loan servicer to request a retroactive deferment or forbearance; this can cancel out the past due balance and bring the account current. Borrowers who apply for an income-driven repayment plan, a type of payment plan tied to income and family size, may be put into an administrative forbearance to suspend payments while their application is processed.
Explore Student Loan Discharge Options
While a loan must be in good standing to qualify for certain federal student loan forgiveness programs like Public Service Loan Forgiveness or Teacher Loan Forgiveness, certain administrative discharge programs are available regardless of the loan’s status.
One of the most popular administrative discharge programs is the Total and Permanent Disability Discharge program, also referred to as TPD Discharge. This program allows borrowers to request cancellation of their federal student loans if they are unable to engage in substantial, gainful activity due to a severe medical impairment. The Department of Education recently resumed processing TPD Discharge applications after a pause earlier this year during a system transition.
There are also several school-based discharge options. These programs include a Closed-School Discharge if a borrower was unable to complete their program due to a school closure, and an Ability to Benefit discharge if they did not have a high school diploma or GED at the time of enrollment, and their school did not adequately test their ability to benefit from the educational program.
Borrowers can also pursue a discharge of their federal student loan debt through bankruptcy. It is difficult, but not impossible, to do this. A borrower must be able to demonstrate that repayment of their student loan would be an undue hardship; to do that, they must initiate an adversary proceeding against their lender (which, for Direct federal student loans is the government) in the bankruptcy court. A new financial attestation process can make it easier for some borrowers to pursue a bankruptcy discharge.
Evaluate Federal Student Loan Default Resolution Programs
If you’re in default on a federal student loan, you may have pathways to get out of default and back into good standing again. Doing so can allow a borrower to avoid involuntary collections actions such as Treasury Offset and administrative wage garnishment. However, default resolution programs can come with some downsides.
One option is loan rehabilitation, which is a temporary payment program typically lasting nine to 10 months. Borrowers make payments based on their income during the rehabilitation period. After successful completion of the rehabilitation program, their student loan would be restored to good standing again, eliminating any immediate risk of offset or wage garnishment. Rehabilitation can also result in the deletion of any default-related credit reporting, although the record of missed payments can remain in a borrower’s credit report for some time. Borrowers should be aware that FFEL guaranty agencies and the Department of Education are authorized under law to charge hefty collections fees, which can be rolled into the overall loan balance upon completion of the rehabilitation program.
Another default resolution option is Direct loan consolidation, which allows borrowers to take out a new loan through the Department of Education that repays any federal student loans that are in default. There is no credit check associated with this process, and borrowers do not have to make payments while in default to consolidate (unlike for rehabilitation), but they must select an income-driven repayment plan for the Direct consolidation loan. Consolidation does not delete any “default” reference on a borrower’s credit report, and – like rehabilitation – can come with significant collections fees. Consolidating loans that have existing IDR credit toward student loan forgiveness can also result in the erasure of that credit.
A final default resolution option would be settlement. However, settlements of defaulted federal student loans are governed by fairly strict guidelines, which limits any resulting balance reduction. Settlements typically must be paid in a lump sum payment, which may be prohibitively expensive for many borrowers. There may also be tax consequences associated with a settlement.
Raise Objections To Student Loan Garnishment Or Request A Hearing
Before the federal government can refer a defaulted federal student loan borrower to Treasury Offset or start garnishing their wages, borrowers must receive an initial notice and an opportunity to respond. The response window is 65 days for Treasury Offset, and 30 days for administrative wage garnishment.
Federal student loan borrowers can dispute the debt during this notice window, or apply for an administrative discharge if they qualify. They can also request a hearing based on financial hardship, which requires that the borrower complete and submit a detailed financial statement form (which typically accompanies the notice paperwork). Any offset or garnishment should be postponed while the borrower’s request is adjudicated, as long as the request is made within the notice period. After offset or wage garnishment has begun, borrowers can still object or request a hearing, but that won’t stop the offset or garnishment unless the borrower ultimately prevails.
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