Feds resuming collection actions on defaulted student loans

Key takeaways: 

• Collections on defaulted federal student loans will restart May 5 after five-year pause
• Borrowers in default risk wage garnishment, tax refund seizures, and Social Security offsets
• Officials urge borrowers to explore loan rehabilitation and consolidation options to avoid penalties

The U.S. Department of Education announced Monday that involuntary collections on defaulted federal student loans will resume next month, ending a pandemic-era freeze that began in 2020. The move will affect millions of Americans, with financial consequences ranging from tax refund seizures to garnishment of wages and Social Security benefits.

Defaulted borrowers face consequences

Starting May 5, the government will once again begin collecting on defaulted student loans through mechanisms such as tax refund offsets and Social Security garnishment. Wage garnishments are expected to resume later in the summer. The change marks the final stage in the Biden administration’s phased restart of federal student loan obligations, which resumed general repayments last year.

Approximately 5.3 million borrowers are currently in default, according to the Education Department. That number could climb as more borrowers fall into delinquency amid rising repayment struggles.

Scott Buchanan of the Student Loan Servicing Alliance said the announcement should be a wake-up call: “Borrowers should be working actively with their servicers and pay attention to our outreach to avoid the meaningful consequences of default.”

Understanding default vs. delinquency

A loan becomes delinquent when a payment is late by more than 90 days and defaults after around 270 days of missed payments. Borrowers in default are no longer eligible for income-driven repayment plans, deferment, or federal aid until they resolve their status.

Experts like Betsy Mayotte, founder of the Institute of Student Loan Advisors, stressed the financial toll of default in a Washington Post report: “It can have a really negative impact on your credit score and prevent you from accessing other financial aid in the future.”

How to avoid or escape default

Borrowers concerned about their status are urged to visit studentaid.gov or wait to be contacted by the Federal Student Aid office, which will reach out in the coming weeks.

Two key options to escape default include:

• Loan Consolidation: A quicker fix, though it can add collection costs and doesn’t erase the default mark from your credit.

• Loan Rehabilitation: Requires nine consecutive on-time payments, but once complete, it removes the default from your record—though prior delinquencies remain.

Older, low-income borrowers at risk

Mayotte warned that older borrowers and those living paycheck to paycheck may be hit hardest by resumed collections. “Student debt is not only a young person’s problem,” she said. “And the older that people get, the higher likelihood they have of defaulting.”

She and other advocates urge borrowers not to delay. “There’s a lot of anxiety and shame around default,” Mayotte noted. “But the first step in feeling better will be to reach out and start talking about resolving the default.”