On April 21, the Department of Education announced that it will resume collections on defaulted federal student loans, starting May 5. The Federal government hasn’t collected on defaulted loans since March 2020. The covid pandemic ushered in a series of student loan payment pauses for federal loan borrowers starting in March 2020. In August 2022, President Biden signed an executive order cancelling up to $10,000 of federal student loan debt for certain borrows, an order that was subsequently struck down by the Supreme Court in June 2023. In June 2023, Congress officially ended the student loan payment moratorium, and the Department of Education announced that federal student loan payments would resume in October 2023. The Department also created the Saving on a Valuable Education (SAVE) Repayment Plan, but this was eventually blocked by a federal appeals court in August 2024.
In its April 21 announcement, the Department of Education noted the following statistics. 42.7 million federal student loan borrowers owed more than $1.6 trillion in student debt. More than five million borrowers have not made a monthly payment over 360 days, and are in default. Four million borrowers are in late stage delinquency (91 – 180 days). The new collections policy technically applies to all 42.7 million borrowers but will most immediately affect the five million borrowers who are currently in default and the four million borrowers who are close to default. Note that different student loans may have different rules on when default status is reached.
Starting May 5, 2025, the Education Department will refer all borrowers whose federal student loans are in default to a federal debt collection service (the Treasury Offset Program) administered by the Treasury Department. Before that date, all borrowers in default should receive email communications from the Office of Federal Student Aid (FSA) encouraging them to start making payments, enroll in an income-driven repayment plan or sign up for loan rehabilitation.
Borrowers (whether student or parent) who are unable to make payments after “sufficient notice and opportunity” will be subject to involuntary collections, which could include wage garnishment. The FSA office expects to send required notices to borrowers about wage garnishments later this summer. Wage garnishment means borrowers in default could see automatic deductions from their paychecks to cover loan payments. Borrowers delinquent on their student loans (missing a payment for 90 days or more) also risk a negative impact to their credit score, which can make it harder to rent an apartment, obtain a credit card, car loan, or mortgage.
Over the next two months, the FSA office plans to send borrowers ongoing email communications with additional information and resources, including an enhanced loan simulator tool, extended call times at loan servicers, and a streamlined income-driven repayment process that will shorten enrollment times and eliminate the need for annual income recertifications. Information will be available on the federal student aid website.
