Facing US student loan default? What you need to know to regain control

Federal student loan collections resume May 5, 2025 in the US, putting over 5 million borrowers at risk of wage garnishment and lost tax refunds.

The US Department of Education will resume collecting on defaulted federal student loans starting May 5, 2025. This decision ends a five-year pause that began during the COVID-19 pandemic. The move affects over 5 million borrowers in default and could lead to wage garnishment, tax refund interceptions, and withholding of federal benefits like Social Security payments.

 

What does this mean?

Prior to the pandemic, borrowers who defaulted on federal student loans faced severe consequences, including:​

 

Wage garnishment

Tax refund interceptions

Withholding of federal benefits, such as Social Security payments​

 

These collection actions were paused in March 2020 as part of pandemic relief measures. The pause was extended multiple times under both the Trump and Biden administrations. However, as of October 2024, the pause officially ended, and the Education Department has now announced the resumption of collections starting May 5, 2025.​

 

 

The Department of Education justifies this move as a step toward restoring fiscal discipline and ensuring that taxpayers are not burdened by unpaid student loans. Education Secretary Linda McMahon emphasized the need for borrowers to take responsibility for their debts and stated that the resumption of collections is necessary for the financial health of the nation .​

 

The Education Department said it will resume referrals to the Treasury Department’s offset programme. This system allows the government to recoup overdue debts by deducting money from federal payments, including income tax refunds and Social Security benefits. After a 30-day warning, wage garnishments will begin.

 

"American taxpayers will no longer be forced to serve as collateral for irresponsible student   loan policies," said Education Secretary Linda McMahon in a statement.

 

About 5.3 million borrowers are already in default, while another 4 million are between 91 and 180 days late. Only 40% of federal borrowers are up to date on their payments.

 

All borrowers in default will receive email communications from the Education Department's Office of Federal Student Aid over the next two weeks, the department said. It will begin sending notices later this summer to start wage garnishment for those in default.

 

The resumption of student loan collections has several significant implications:

 

 Millions of borrowers who have been in default for years may now face wage garnishment and the loss of tax refunds or federal benefits, which could lead to severe financial distress.​

 

Critics argue that withholding Social Security benefits from seniors and disabled individuals is particularly harmful and counterproductive. These individuals may rely on such benefits for basic living expenses, and garnishing these funds could push them further into poverty .​

 

 While the Department of Education has announced plans to assist borrowers through income-driven repayment plans and loan rehabilitation programs, there is concern that these options may not be accessible or sufficient for all borrowers, especially those with limited financial resources .​

 

The decision to resume collections has sparked criticism from Democratic lawmakers and advocacy groups, who argue that it disproportionately affects vulnerable populations and undermines efforts to provide student loan relief. Additionally, the cancellation of broad student loan forgiveness plans has left many borrowers without the relief they were expecting .​

 

What borrowers should do

Borrowers who are in default or behind on payments should take immediate action to avoid the resumption of collections

 

Contact the Default Resolution Group: This group can assist in arranging payment plans or enrolling in rehabilitation programs.​

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Explore Income-Driven Repayment Plans: These plans adjust monthly payments based on income and family size, making payments more manageable.​

 

Stay Informed: Keep an eye out for communications from the Department of Education regarding the resumption of collections and available assistance programs

 

What Is Loan Rehabilitation?

Loan rehabilitation is a one-time opportunity for borrowers with defaulted federal student loans to regain good standing. It involves making nine consecutive, voluntary, on-time payments over a 10-month period. These payments are typically based on the borrower's income and must be agreed upon with the loan servicer .​

 

Steps to Enroll in Loan Rehabilitation:

Contact Your Loan Servicer: Reach out to your loan servicer to initiate the rehabilitation process.

 

Provide Documentation: Submit documentation of your income and expenses to determine an affordable monthly payment.

 

Agree on a Payment Plan: Work with your servicer to establish a reasonable payment amount, which can be as low as $5 per month if necessary .

 

Make Timely Payments: Ensure that each payment is made on time, within 20 days of the due date, to count toward the rehabilitation process.

 

Loan rehabilitation can only be used once. If you default again after rehabilitation, your options are limited.

 

Involuntary Payments Don't Count: Payments made through wage garnishment or tax refund offsets do not count toward the nine required payments.

 

In order to address the broader student loan crisis, lawmakers are also pushing for structural reform. A bipartisan bill — the Employer Participation in Repayment Act — could provide employers a tax-free incentive of up to $5,250 annually to help employees repay their student loans. 

 

Context:

This move comes after the Biden administration's efforts at broad student loan forgiveness were blocked by courts. The shift in policy, initiated under the Trump administration, has drawn criticism from advocates who cite instability and confusion in student loan policy changes. Currently, less than 40% of borrowers are current on payments, and millions are behind .​  With inputs from Agencies