Collections on defaulted student loans restart: What to know?

After nearly a five-year pause on penalties, the US government began collecting defaulted student loans from borrowers yesterday.

According to the Trump administration, those who haven’t made any payments in nine months will risk their debt being deducted from their tax refunds, social security payments, and wages.

Student loans are considered in default if payments have not been made for over 270 days.

The Education Department has not collected on defaulted loans since imposing a pause in March 2020 due to the COVID-19 pandemic.

Who will it affect?
Of the 43 million Americans with student loans, around 5 million borrowers are in default, and only a third have consistently paid.

Defaulting borrowers will receive an email from Federal Student Aid alerting them. They can contact the Default Resolution Group to set up a monthly payment or enroll in an income-based repayment plan.

After 30 days, tax refunds and social security payments could be withheld. Wage garnishment, where an employer will be notified to withhold the student debt from a borrower’s wages, will also happen.

Defaulting on payments will start affecting credit scores and could sink them as much as 171 points. This could make getting a future loan and renting houses difficult.

According to officials, total student debt has ballooned to $1.6 trillion since the pandemic-era pause.

While Biden previously forgave loans for 5 million borrowers, Trump’s Education Secretary, Linda McMahon, says there will be no mass forgiveness going forward, arguing that unpaid debt ultimately shifts the burden to taxpayers.