Did you default on your student loans? What to know as collections restart
The U.S. government will resume involuntary collections on defaulted federal student loans next month, the Education Department announced Monday, ending a five-year pause that began at the start of the COVID-19 pandemic.
U.S. universities are among the most expensive in the world and about 42.7 million borrowers owe more than $1.6 trillion in student debt, according to the Education Department.
Of those, about 5.3 million borrowers are in default—a number that could grow as delinquency rates soar—and may see money withheld from tax refunds and Social Security benefits.
Here’s what to know.
When will collections resume?
Involuntary collections on federal student loans in default will resume on May 5, according to the Education Department. Wage garnishing will resume in the summer.
Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for student loan servicers, said the move continues the Biden administration’s decision to resume federal loan repayments in 2023. He called it “an important reminder that borrowers should be working actively with their servicers and pay attention to our outreach to avoid the meaningful consequences of default.”
What does it mean to be in default?
Federal student loans go into default if the borrower does not make scheduled payments for certain number of days, generally more than 270. This is different from delinquency, which is reported to credit bureaus after 90 days. Betsy Mayotte, president and founder of the Institute of Student Loan Advisors, stresses that “there’s a big difference between those two statuses.”
Defaulting “can have a really negative impact on your credit score and prevent you from accessing other financial aid in the future,” she said.
How do I know if my student loans are in default?
The Education Department said that the Office of Federal Student Aid (FSA) will contact all borrowers in default over the next two weeks. You can also check at studentaid.gov.
How can I get out of delinquency or default?
If your loan is in delinquency, you may be eligible for a number of options, such as income-driven payment plans, deferments or forbearance and public service loan forgiveness.
But, “once you’re in default, you’re not eligible for any of those things,” Mayotte said.
There are three options to get out of default. You could theoretically repay the entirety of the loan, but the most feasible options are consolidation and rehabilitation. Consolidation is faster, but comes with collection costs and does not entirely remove the default line on a borrower’s credit.
Rehabilitation “takes longer, but it has more benefits,” said Mayotte. After rehabilitation, which requires nine on-time payments, the loan will come out of default as if it had never occurred—though delinquencies leading to the default will remain on your credit report for the usual time.
How are collections on default loans made?
If you are in default, most federal payments, with a few exceptions, can be garnished, said Mayotte. The government may garnish wages, social security, or offset your tax refund. You can also incur collection costs.
Who is likely to be affected?
Mayotte is worried about those living paycheck to paycheck and those who rely on social security. She noted that student debt is not only a young person’s problem, “and the older that people get, the higher likelihood they have of defaulting.”
What can I do before student loan collection restarts?
Buchanan advises those in default to “familiarize yourself with your loan balances and research options like loan rehabilitation and consolidation.”
Mayotte sees “a lot of anxiety, a lot of shame” among defaulted borrowers, which can get in the way of action, but, she added, “the first step in feeling better will be to reach out and start talking about resolving the default.”
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