Involuntary Collections Explained for Student Loan Borrowers

Yahoo

01-05-2025

Students studying in a library. Credit - Maskot—Getty Images
The U.S. Department of Education announced on April 21 that the Office of Federal Student Aid (FSA) will restart its student debt collections on May 5.
The announcement marks the first time in five years that the federal government may penalize Americans who fall behind on their student loan payments. Part of that penalization includes the resumption of 'involuntary collections,' which can lead to the garnishing of wages. According to the announcement, borrowers will begin receiving collection notices through the U.S. Treasury Offset Program before any further action is taken.
'The Department will also authorize guaranty agencies that they may begin involuntary collections activities on loans under the Federal Family Education Loan Program,' per the press release. There is the disclaimer, though, that '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.'
Involuntary collections are 'one of the harshest consequences borrowers can face when federal student loans fall into default,' says Ken Ruggiero, co-founder and CEO of Ascent Funding, an education loan provider. This occurs typically after 270 days, or close to nine months, of missed payments.
'It's an aggressive, automated system that often catches borrowers off guard and deepens their financial hardship,' says Ruggiero. 'In addition to the financial hardship, the student borrower is often embarrassed when their employer is notified and then implements wage garnishments.'
Here is what student borrowers should know about involuntary collections, and the advice experts offer:
Through involuntary collections, the government can garnish wages, withhold tax refunds, and seize portions of Social Security checks and other benefit payments to go toward paying back the federal loan.
According to the Treasury Department, for those who have defaulted on their federal loans, the Treasury Offset Program can withhold to 100% of federal tax refunds, up to 15% of federal salaries, up to 15% of Social Security and Railroad Retirement benefits, up to 25% of federal retirement payments, 100% of payments to vendors, and 100% of travel payments for federal employees.
Wage garnishment, which the Education Department's announcement said will begin late in the summer, is when your loan holder can order your employer to withhold up to 15% of your disposable pay to collect your defaulted debt, without taking you to court.
Department of Education Secretary Linda McMahon wrote an opinion piece in the Wall Street Journal in conjunction with the announcement of collections restarting, in which she articulated the department's outlook.
'Borrowers who don't make payments on time will see their credit scores go down, and in some cases their wages automatically garnished,' she wrote. 'Why? Not because we want to be unkind to student borrowers. Borrowing money and failing to pay it back isn't a victimless offense.'
Jonathan Collins, assistant professor of political science and education at Teachers College, Columbia University, says that though this is a pre-2020 system, there is a difference here with the Trump Administration.
'Usually standard practice for the federal government is to work with the borrowers, and if there are issues with repayment, they usually grant forbearance periods, and you can apply for extension on forbearance periods,' Collins says. 'But, what [The Trump Administration is] trying to do is get rid of, if not drastically reduce, the amount of people who are in this forbearance zone.'
Experts' main advice is to be proactive and act now. 'All of the responsibility is on the borrower,' says Nicholas Hillman, professor in the school of education at the University of Wisconsin-Madison. But there are options out there for borrowers.
Ruggerio suggests that those struggling to meet payments should explore an income-driven repayment (IDR) plan, with the intention of reducing their monthly payments in accordance with their income and family size. 'The window to get out of default through options like consolidation or rehabilitation is still open—waiting until collections begin only limits your options,' he says.
On Feb. 18, 2025, a federal court issued a new injunction preventing the Department of Education from implementing the Saving on a Valuable Education (SAVE) plan. But other repayment programs remain available, including the Pay As You Earn (PAYE) program and the Income-Contingent Repayment (ICR) plan.
Hillman recommends navigating through the federal loan servicers to identify who your loan servicer is, and then contacting said federal loan servicer for further information. Collins adds that in order to do this, borrowers must first make sure that their loans were federally supplied, rather than serviced through the private sector. This way, borrowers can have a clear idea of where their loan stands.
Khandice Lofton, counsel at the Student Protection Borrower Center (SPBC), recommends that borrowers look at the National Consumer Law Center (NCLC), which has a toolkit that provides information for how borrowers can seek consolidation or rehabilitation—two ways borrowers can get out of default by either making payments or consolidating their loans.
Furthermore, Lofton also recommends looking into legal and political modes of protesting the way in which the Trump Administration is continuing the student federal loan collections.
'What we're pushing right now is for every borrower to take steps to reach out to their elected officials. Why? Because these officials [are] now responsible for helping them get engaged in government programs,' she says.
Part of the confusion related to involuntary collections, experts say, relates to both the pause on student loan collections and repayments brought about by the COVID-19 pandemic—a pause which occurred from March 2020 until September 2023, as well as the efforts by former President Joe Biden to grant student loan forgiveness—attempts that were struck down at the courts and differ from President Donald Trump and his Administration.
Still, federal student loan repayments began again in Oct. 2023, though the Biden Administration gave one year as an 'on ramp' for borrowers to transition back to repayments, notes Hillman. For that one year—from Oct. 1, 2023 until Sept. 30, 2024—the records of student borrowers who missed monthly payments would not be considered delinquent, nor would the individuals be reported to credit bureaus, sent to collections, or referred to the Treasury Offset Program.
But after Sept. 30, 2024, Hillman says the 'ramp was closed, and it's sort of business as usual'—a return to the 2020 repayment system. And now, starting May 5, major consequences may be felt by around 9.7 million borrowers who are past due on their bills since the end of the relief period, according to the Federal Reserve Bank of New York.
But, the confusion regarding these systems, Hillman argues, means that many Americans may have defaulted on their student loans without fully understanding the consequences. This is exacerbated as Biden's SAVE program makes its way through the courts and Republicans propose to overhaul the repayment plans, all while the Trump Administration attempts to dismantle the Department of Education, which houses the FSA.
'It's so confusing for borrowers,' says Lofton. 'Borrowers should understand this isn't their fault, and they shouldn't be forced to pay the price for this dysfunction that's going on right now.'
Lofton also argues that the Trump Administration's commitment to restarting collections is misaligned with the affordability arguments upon which the President campaigned.
'This could not have come at a worse time where things right now are so uncertain, financially and economically, and during a time where borrowers are already struggling to pay for things like rent, groceries, medical bills, just day to day life,' Lofton says.
The important thing to remember, Hillman notes, is that student loan borrowers who have found themselves in limbo are not alone.
'You have like a third of borrowers who are current, they're making payments. You have a third of borrowers who are either in some sort of deferment or forbearance … and the other third are either going for or [already] in default,' Hillman says. "It's massive, because the loan repayment system is fundamentally broken.'
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