Collection of defaulted student loans to resume May 5: What to know
Since the pandemic, federal student loan borrowers have been mostly protected from the harshest consequences of defaulting. That’s about to change on May 5.
With just a few days until May, the federal government will soon resume involuntary collections for borrowers with defaulted loans.
Former President Joe Biden first announced the administrative forbearance in 2020, pausing loan payments and setting interest rates to 0% from March 13, 2020 to Sept. 1, 2023.
The Biden administration announced multiple extensions on the repayment pauses, including an announcement in Dec. 2021 to extend the program for another 90 days. Most borrowers were ordered to begin paying their loans back again in October 2023, the U.S. Department of Education said.
After President Donald Trump returned to office, his administration announced that the U.S. Department of Education would start collecting payments for defaulted federal student loans beginning May 5.
The administration went on to say that while Congress ordered many borrowers to start making payments again in October 2023, “the Biden-Harris Administration refused to lift the collections pause and kept borrowers in a confusing limbo.”
Today, only 38% of borrowers are caught up on their student loans, according to the Department of Education.
Here’s what we know so far.
When will the government begin collecting student loan payments again, and why?
Payments will resume for defaulted student loans on May 5, according to the Department of Education.
According to the department, collecting payments again will ensure taxpayers are not “shouldering the cost of federal student loans that borrowers willingly undertook to finance their postsecondary education.”
“The Biden Administration misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear,” said U.S. Secretary of Education Linda McMahon in a press release. “Hundreds of billions have already been transferred to taxpayers. Going forward, the Department of Education, in conjunction with the Department of Treasury, will shepherd the student loan program responsibly.”
Also on May 5 comes the restart of the Treasury Offset Program, which collects past-due debts such as child support payments. The program matches people and businesses who owe delinquent debts with money federal agencies pay for, allowing the government to withhold money to pay delinquent debts, according to the Bureau of the Fiscal Service.
According to the Trump administration, 42.7 million borrowers owe more than $1.6 trillion in student debt, and over 5 million borrowers have not made a payment in over 360 days.
What is a defaulted student loan, and what is deferment?
Defaulted student loans start with delinquency, according to Federal Student Aid, a program within the Department of Education. Student loans become past due or delinquent the first day after borrowers miss a payment. Accounts remain delinquent until borrowers pay the past due amount, choose another repayment plan or get a deferment or forbearance.
If student loans are past due for more than 90 days, loan servicers will report the accounts to national credit bureaus, which can negatively impact credit scores, the department said.
Some loans can also be listed as being in deferment, where borrowers don’t have to make payments, per Federal Student Aid.
“With deferment, you won’t have to make a payment,” program administrators said on the Federal Student Aid website. “However, you probably won’t be making any progress toward forgiveness or paying back your loan.”
Deferments may be granted for those currently enrolled in school, those undergoing cancer treatment, economic hardship, graduate fellowship, military service and post-active duty, Parent PLUS borrowers, rehabilitation training and those who are unemployed.
How do bankruptcies impact student loans?
Per Federal Student Aid, federal student loans may be canceled if borrowers:
- Have declared bankruptcy.
- Have a Direct Loan, Federal Family Education Loan Program loan or Federal Perkins Loan.
- File a separate action known as an “adversary proceeding.” Borrowers who file for adversary proceedings are essentially asking bankruptcy court to rule that repaying the loan would “impose undue hardship on you and your dependents.”
What if I have student loans through a private lender?
While the government will begin collections for defaulted student loans on May 5 through the Treasury Offset Program, things work differently with private lenders.
According to the National Consumer Law Center, or NCLC, private lenders may:
- Collect the funds themselves
- Send accounts to a collection agency
- Write off and sell debt to a third party debt collector, and possibly work with borrowers to help them get out of default
- Sue borrowers
While the government legally has to offer borrowers “get out of default” programs, private lenders are not required by law to offer them, the NCLC said.
What steps can I take to get back on track?
There is an online loan simulator that helps borrowers figure out which loan repayment options are best suited for them at www.studentaid.gov/loan-simulator, per Federal Student Aid.
Program officials said borrowers can also use it to decide whether to consolidate student loans.
Other options include applying to income-driven repayment plans, which are based on “a percentage of your discretionary income,” per officials.
Those on income-driven repayment plans must update the plans each year with their income and family size, and by the end of the repayment period, any remaining balance may be forgiven.
All federal borrowers in default will receive notice by email over the next two weeks, per the Department of Education. The notices will push borrowers to make loan payments, enroll in an income-driven repayment plan or sign up for loan rehabilitation or consolidation.
Contributing: Zachary Schermele
Saleen Martin is a reporter on USA TODAY’s NOW team. She is from Norfolk, Virginia – the 757. Email her at [email protected].