What Student Loan Borrowers Should Know About The New Collections Crackdown By The Department Of Education

Forbes

23-04-2025

NEW YORK, NEW YORK - MARCH 07: United States Secretary of Education Linda McMahon visits "Fox & ... More Friends" at Fox News Channel Studios on March 07, 2025 in New York City. McMahon recently announced that collections would resume against defaulted federal student loan borrowers.(Photo by)
More than five million student loan borrowers are in the Department of Education's crosshairs after the Trump administration announced new collections efforts targeting those in default on their federal student loans earlier this week. These borrowers may soon be subject to draconian collections actions by the government including wage garnishment and the offset of Social Security payments and other federal income streams. Millions of additional borrowers may also be targeted as they begin to fall further behind on their monthly payments.
'American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,' said U.S. Secretary of Education Linda McMahon in a statement on Monday. 'Going forward, the Department of Education, in conjunction with the Department of Treasury, will shepherd the student loan program responsibly and according to the law, which means helping borrowers return to repayment—both for the sake of their own financial health and our nation's economic outlook.'
Student loan borrower advocacy groups were critical of the department's decision to resume collections actions after a five year pause, particularly as many borrowers are struggling to navigate a complex repayment system that has been upended by legal challenges and administrative changes.
'Since February, Donald Trump and Linda McMahon have blocked these borrowers' path out of default and are now feeding them into the maw of the government debt collection machine,' said Mike Pierce, Executive Director of the Student Borrower Protection Center, in a statement. "This is cruel, unnecessary, and will further fan the flames of economic chaos for working families across this country."
Here's what student loan borrowers need to know about the Department of Education's crackdown on defaulted federal student loan borrowers.
The newly announced collections efforts by the Department of Education will target borrowers who are in default on their federal student loans, including Direct loans and FFEL-program loans. Under federal law, default occurs after a borrower falls more than 270 days behind on their monthly payments (prior to that 270-day threshold, the loan is considered to be 'delinquent' or past due). More than five million borrowers are currently in default on their federal student loan, according to the department.
'More than 5 million borrowers have not made a monthly payment in over 360 days and sit in default—many for more than 7 years,' said the department in a statement on Monday. But additional borrowers are delinquent on their federal student loans and may go into default within the next several months, which could dramatically increase the total number of borrowers who will be facing the department's collections efforts.
'Only 38 percent of borrowers are in repayment and current on their student loans,' said the department. '4 million borrowers are in late-stage delinquency (91-180 days). As a result, there could be almost 10 million borrowers in default in a few months. When this happens, almost 25 percent of the federal student loan portfolio will be in default.'
The Department of Education intends to deploy two primary collections programs against defaulted federal student loan borrowers: Treasury Offset, and administrative wage garnishment. Both of these programs were effectively shut down in 2020 due to the Covid-19 pandemic, and haven't resumed operating since then, until now.
Treasury Offset is a broad program that allows the government to intercept federal tax refunds, offset federal benefits (such as Social Security payments), and seize other federal income streams such as the salaries of federal employees and payments sent to individual federal contractors.
'FSA will restart the Treasury Offset Program, administered by the U.S. Department of Treasury, on Monday, May 5, 2025,' said the department in its announcement.
Separately, the department will also pursue administrative wage garnishment against borrowers in default on their federal student loans. Through administrative wage garnishment, the government can order a private or public employer to withhold a portion of a borrower's employment earnings (typically 15%) and transfer it to the Department of Education. The government can do this without filing a lawsuit or going through a court. The department indicated it will initiate the process to garnish wages this summer.
To go after a borrower's assets, such as bank accounts or property, the Department of Education would have to file a lawsuit against the borrower in court and obtain a judgment. The Trump administration has not indicated whether any collections lawsuits are planned as part of the department's broader collections efforts.
The Department of Education said that it will initiate outreach efforts to defaulted federal student loan borrowers before collections activities resume next month. However, the department did not address how such efforts may be impacted by the fact that the department's staff has been effectively cut in half by mass firings and resignations, as the Trump administration takes steps to shutter it.
'All borrowers in default will receive email communications from FSA over the next 2 weeks making them aware of these developments' and urging them to contact the department, reads Monday's statement. 'FSA will conduct outreach to borrowers through emails and social media reminding them of their obligations and providing resources and support to assist them.'
Once the government begins pursuing Treasury Offset or administrative wage garnishment against defaulted federal student loan borrowers, certain procedures must be followed. In particular, borrowers are entitled to an initial notice and an opportunity to respond or object.
'All FSA collection activities are required under the Higher Education Act and conducted only after student and parent borrowers have been provided sufficient notice and opportunity to repay their loans under the law,' said the department.
Typically, borrowers in default on their federal student loans have 65 days to respond to a Treasury Offset notice, and 30 days to respond to an administrative wage garnishment notice. Within that timeframe, borrowers can dispute the debt, request an administrative hearing on the basis of hardship, or pursue a discharge of their federal student loans if they are eligible (such as if they are totally and permanently disabled).
Borrowers can also avoid Treasury Offset or wage garnishment during the notice period by resolving their federal student loan defaults through a rehabilitation plan (a temporary payment plan based on the borrower's income) or Direct loan consolidation. These programs can restore the loans back to good standing, allowing the borrower to take advantage of various repayment plan options, as well as deferments and forbearances. However, these programs can also come with some downsides, such as hefty collections fees in some cases.
Once the notice period passes, borrowers may still have options to submit an application to discharge their student loans (if they are eligible), request a hearing based on hardship, or pursue default resolution programs like rehabilitation or consolidation. However, if offset or garnishment has already begun, those actions typically won't stop until there is a resolution or a decision on the borrower's objection. And administrative wage garnishment in particular can make default resolution options more complicated (for instance, typically borrowers cannot consolidate their loans through the Direct consolidation program while in active wage garnishment).
Student loan borrowers who are delinquent on their loans but haven't yet defaulted may have options to avoid default and collections altogether. These options can include requesting a deferment or forbearance (which can bring the account current, voiding out any past delinquency), and applying for income-driven repayment plans. IDR plans offer borrowers affordable payments tied to their income and family size. While the IDR processing system remains in turmoil, the Department of Education has indicated that borrowers who apply for an IDR plan will be moved into a forbearance while their application is processed.