CNN
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The Department of Education restarts collections of loans in default on Monday, putting millions of borrowers at risk of having their benefits and wages garnished.
The move arrives as the Trump administration works to dismantle the Education Department and aggressively roll back former President Joe Biden’s policies, including those around student loan forgiveness.
It’s expected to affect the more than 5 million borrowers who are in default. And that number could rise over the next few months: There are 4 million additional borrowers in “late-stage delinquency,” which occurs after 90 days without payment, the department said in a news release last month.
Here’s what we know so far:
Federal student loans go into default after 270 days without payment. If you are not in default, the move to restart sending loans in default to collections will not affect you.
When a student loan goes in default, it will be reflected on your credit report. You can check on the status of your loan by reaching out to your student loan servicer or visiting the Federal Student Aid website for more information. Experts who spoke with CNN recommend that even if you know your loans aren’t in default, you should still check on the status of your loans and stay informed on options available to you.
How can the government garnish my wages and benefits?
As part of its move to resume collection of these debts, the government has restarted the Treasury Offset Program, which collects debts by garnishing federal and state payments, such as tax returns or social security benefits. This will only apply to you if you are in default.
The Education Department also said in April that it will restart the process of administrative wage garnishment this summer. That allows the agency to order non-federal employers to withhold part of an employee’s income to pay off the student loans in default.
The Education Department has urged borrowers in default to contact the student aid office’s Default Resolution Group and make a monthly payment, enroll in an income-driven repayment plan, or sign up for loan rehabilitation.
Borrowers in default are able to rehabilitate their loans by making nine voluntary, uninterrupted payments over a 10-month period. A borrower can only rehabilitate a defaulted student loan one time. Read more on the process on the student aid office’s website here.
Borrowers must first contact their loan servicer and agree in writing to make the payments. The amount of the payments is set by the loan holder, and borrowers must provide documentation of their income. It will be equal to either 10% or 15 % of your annual discretionary income, divided by 12, according to the Education Department’s website.
If you don’t know who your loan servicer is, you can find out through the Office of Federal Student Aid here.
After the nine consecutive payments are made, the loan will no longer be in default status and the default notice will be removed from your credit report – but having been in delinquency prior to the default will still be visible on your report.
If administrative wage garnishment was in place before the rehabilitation process began, it would continue until the borrower has made at least five of the required nine payments.
Loan consolidation allows borrowers to combine multiple federal student loans into one loan with a single monthly payment and no application fee. Borrowers will have to pay any future interest on the higher balance, which could cause them to pay more overall. Borrowers can also switch to a different student loan servicer if they consolidate their loans.
The Direct Consolidation Loan Application is available here.
However, for borrowers on an income driven repayment plan and looking for forgiveness after 20 or 25 years, consolidation does “restart that clock,” student loan lawyer Jay Fleischman told CNN.
According to the Department of Education’s website, if you go into default, you can no longer receive deferment or forbearance, which allow you to temporarily stop making payments on your loan. You will also no longer have the ability to choose a repayment plan.
However, “once borrowers complete loan rehabilitation or consolidate to cure the default, they regain access to deferment, forbearance, and income-driven repayment plans,” Fleischman said.
“The loss of these options does not depend on the loan being sent to collections,” he noted. “When a borrower defaults, the law restricts these options until the loan is brought out of default.”
Though the Trump administration is moving away from Biden-era efforts to forgive student loan debt, there are other ways for borrowers to “discharge” their debt.
Unlike some other consumer loans, student loans can only be discharged if a borrower meets certain specific criteria. For some borrowers, this is possible if they’ve declared bankruptcy and demonstrate undue hardship.
More student loan borrowers have successfully received debt relief through bankruptcy since the Biden administration simplified the burdensome process of showing undue hardship and made it easier for government lawyers to recommend to courts that the debt be discharged.
“People should look at what’s called the Brunner Test, because that’s what’s used most of the time in bankruptcy for student loans, and if they think they might fit the criteria, it is something to explore,” student loan expert Betsy Mayotte told CNN.
The Brunner Test requires showing that a borrower cannot maintain a minimal standard of living if forced to repay the student loans, that this financial situation will continue for the majority of the loan repayment period and that a good faith effort has been made to pay.
While it is unclear if the Trump administration will maintain the Biden administration’s guidance, Malissa Giles, a consumer bankruptcy attorney from Virginia, told CNN her perception is that “the current administration will be less generous than the Biden administration was.”
“I personally think that if you don’t meet those presumptive factors, then it’s going to be a lot, lot harder under this administration to get an agreed decision of a hardship discharge or reaching a hardship discharge,” she added.
Borrowers need to be aware of any scams that may deceive them with false promises of debt relief or more affordable payment plans.
Student loan-related announcements like the one the Education Department made last month “make great talking points for scammers that go after some of the most vulnerable borrowers, and defaulted borrowers fall under that category,” Mayotte said.
“There’s never a fee to access rehabilitation or consolidation, and paying someone a fee is not going to get it for you any faster, or get you a better deal than you can by just doing it yourself,” she explained.
More information about avoiding student loan related scams can be found on the student aid office’s website here.
