The latest announcement from the Education Department could impact millions of borrowers with federal student loans.
WASHINGTON — Starting next month, the Education Department says student loans that are in default will be referred for collections.
Roughly 5.3 million borrowers are in default on their federal student loans and soon could be subject to having their wages garnished.
Since March 2020, referrals for debt collection were suspended due to the COVID-19 pandemic. During this time, the U.S. government also paused the requirement for federal student loan payments and the accumulation of interest as a temporary form of assistance. This relief period, which was extended by the Biden administration multiple times, ultimately concluded in October.
The department says it will soon begin sending notices on collection efforts, but there are options for borrowers to get out of default.
Here are some key things to know.
How will involuntary collection work?
Starting on May 5, the Department of Education will resume involuntary debt collection by utilizing the Treasury Department’s offset program. Individuals with defaulted student loans will be contacted by Federal Student Aid in the coming weeks to provide them with information regarding the available options.
Involuntary collection entails the government being able to collect payments by garnishing wages, intercepting tax refunds, and seizing portions of benefits such as Social Security checks. These measures are taken to allocate funds towards repaying the outstanding loan amount.
What is the difference between delinquent and default in my student loans?
A student loan becomes delinquent when a borrower doesn’t make a payment 90 days after its due date. If you continue to be delinquent on your loan for 270 days — or roughly nine months — then your loan goes into default.
While being delinquent affects your credit score, going into default has more serious consequences such as wage garnishment.
What happens when a loan goes into default?
When you fall behind on a loan by 270 days, the loan appears on your credit report as being in default. Once a loan is in default the government will send the borrower into collections.
What can I do right now if my student loan is in default?
The Education Department is recommending borrowers visit its Default Resolution Group to make a monthly payment, enroll in an income-driven repayment plan, or sign up for loan rehabilitation.
Betsy Mayotte, president of The Institute for Student Loan Advisors, recommends loan rehabilitation as an option.
Borrowers in default must ask their loan servicer to be placed into such a program. Typically, servicers ask for proof of income and expenses to calculate a payment amount. Once a borrower has paid on time for nine months in a row, they are taken out of default, Mayotte said. A loan rehabilitation can only be done once.
What does forbearance mean?
Student loan forbearance is a temporary pause on your student loan payments granted to borrowers who are experiencing financial difficulties. To apply for forbearance, borrowers must contact their loan servicer.
Borrowers can be granted forbearance by their loan servicer for up to 12 months but interest will continue to accrue during this period.
