As the White House stated that it "can and will" take borrowers' wages, pensions, and tax refunds, the Trump administration announced Monday that it will resume debt collections for federal student loan borrowers who have fallen behind on their payments. This puts millions of borrowers at risk of having federal payments or parts of their salaries withheld in the upcoming months.
Resuming collections on defaulted loans in the federal student loan portfolio, which includes Pell Grants, Perkins Loans, Federal Family Education Loans, and Direct Loans, among other loans, was announced by the Department of Education.
Student loan default occurs when borrowers fail to make loan payments for a predetermined period of time, usually 270 days, or around nine months, after which the full amount owed, plus interest, is due.
Millions of borrowers will be impacted by the action because, according to the Education Department, over five million borrowers are already behind on their loans, and another four million are in "late-stage delinquency," which means they are not making payments and are getting close to being in default.
According to the organization, student loan debt collections have previously been halted since the start of the COVID-19 outbreak in March 2020.
On May 5, the Trump administration will relaunch the Treasury Offset Program, which permits the government to withhold various federal payments, such as Social Security payments, tax refunds, and federal salaries, from individuals who owe money to the federal government.
The government will also begin notifying defaulting borrowers "later this summer" about wage garnishment, which allows the federal government to deduct up to 15% of borrowers' earnings in order to repay their debts
An Important Quotation
White House press secretary Karoline Leavitt informed reporters on Tuesday that borrowers would now be required to return their loans, and any who fail to do so will be subject to involuntary collections. "Borrowers' tax refunds, federal pensions, and even their wages may be withheld by the government in order to collect federal student loan debt."
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How Can Borrowers Determine Whether They've Defaulted?
Over the course of the next two weeks, borrowers who have fallen behind on their payments will get warnings imploring them to make amends before penalties are applied.
Unexpected Information
The Education Department reported Monday that only 38% of borrowers are in repayment and up to date on their student loan installments, indicating that defaulting or falling behind on repayments is not unusual. The department stated Monday that if the millions of borrowers who are on the verge of default do not begin making payments, nearly 25% of all federal student loan borrowers could be in default in the upcoming months.
When student loan borrowers are in default, what federal payments are withheld from them?
Beginning on May 5, the Treasury Offset Program will withhold a portion of government payments from student loan borrowers who have fallen behind on their payments. The federal government will utilize the withheld money to assist in collecting the borrower's outstanding student loan balance. The government can withhold up to 100% of federal tax refunds, up to 15% of federal salaries, up to 25% of federal retirement payments, up to 15% of Social Security and Railroad Retirement benefits, 100% of vendor payments, and 100% of federal employee travel reimbursements under that program. Additionally, for states with reciprocal agreements with the federal government, it may impact up to 100% of some state payments.
Beginning on May 5, certain government funds will be withheld from student loan borrowers who have fallen behind on their payments through the Treasury Offset Program. The federal government will use the withheld funds to assist in collecting the student loan balance owed by the borrower. Up to 100% of federal tax refunds, 15% of federal salaries, 15% of Social Security and Railroad Retirement benefits, 25% of federal retirement payments, 100% of vendor payments, and 100% of federal employee travel reimbursements may be withheld by the government under that program. Some states that have reciprocal arrangements with the federal government may also see up to 100% of their payments affected.
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Wage garnishment: What Is It?
Wage garnishment occurs when the government, acting without a court order, directs a borrower's employer to deduct up to 15% of the borrower's post-tax salary in order to pay back the government for the loan. Until the loan is paid up in full or the borrower is no longer in default, the wage garnishment will continue. Borrowers must be given a minimum of 30 days' notice before their income is withheld by the government, and they must be given the chance to either reach a repayment agreement or contest the wage garnishment in court before the withholding begins. Additionally, workers cannot be disciplined
For a number of reasons, including as being incapacitated or having filed for bankruptcy and had the debt canceled, borrowers may contest their wage garnishment. If withholding 15% of their income would cause them "extreme financial hardship," they may also request a ruling against the wage garnishment; however, the National Consumer Law Center points out that this is usually only granted if borrowers can demonstrate a "significant and urgent" issue, such as facing foreclosure or eviction.
What Impact Will Student Loan Payment Default Have on Borrowers' Credit Score?
In agreement. Borrowers' credit ratings are harmed by not making student loan payments, particularly by skipping installments and defaulting on them. Although the Consumer Financial Protection Bureau states that student loan defaults must be removed from a borrower's credit history after seven years, they will remain visible to anyone looking up the borrower's credit for seven years following the default.
Will Borrowers' Student Loan Debt Be Collected by Private Debt Collection Agencies?
No. According to the Department of Education, debtors will only be subject to debt collection operations from the federal government directly because private collection companies are not involved with defaulted federal student loans.
How Can Borrowers of Student Loans Avoid Default?
In order to avoid financial penalties, borrowers who have fallen behind on their loans may attempt to rehabilitate their debt. This involves making nine consecutive payments to the loan holder in order to escape default. In addition, borrowers have the option to pay off their entire debt in one lump sum or combine it into a new Direct Consolidated Loan, which will remove them from default.