For the first time in roughly five years, borrowers who have defaulted on their federal student loan debt will face collection activity, including the garnishment of their wages and retirement benefits. A new U.S. Department of Education memo outlines the details of when garnishments may resume, with some cases starting as early as this summer. There are around 7.5 million federal student loan borrowers in default, leading to concerns about a potential crisis similar to the 2008 mortgage crisis.
After a Covid-era pause on federal student loan payments expired in September 2023, the Biden administration offered borrowers a 12-month “on-ramp” to repayment. Now, federal student loan borrowers in default may see their wages garnished starting in October of this year, and Social Security benefit offsets could resume as early as August. The memo encourages the Department of Education to continue working to avoid defaults by helping borrowers enroll in affordable repayment plans and explore forgiveness opportunities before formal default.
The memo also mentions incentives for borrowers to sign up for automatic payments to their student loan servicer, such as a percentage point reduction in interest rates. Additionally, for the first time, borrowers in default will be able to enroll in the Income-Based Repayment plan and have a pathway to forgiveness, without needing to exit default first. Most collection fees on federal student loans have been eliminated, and the protection of Social Security benefits from offset has been increased, providing relief for more than half of affected borrowers and reducing the offset amount for many others.
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