3 options for student-loan borrowers in default to protect their wages and Social Security

Business Insider

17-05-2025

This summer, millions of student-loan borrowers could lose some of their wages and federal benefits if they don't start making payments.
They have options to avoid those consequences — but it won't be easy.
After President Donald Trump's administration restarted collections on defaulted student loans on May 5, his Education Department said it sent notices to 195,000 defaulted borrowers that some of their federal benefits, like Social Security, may start being withheld in early June.
"Later this summer, all 5.3 million defaulted borrowers will receive a notice from Treasury that their earnings will be subject to administrative wage garnishment," the department said. Most federal borrowers enter default when they have not made a payment in over 270 days.
Business Insider has spoken to student-loan borrowers behind on payments and worried about how they'll budget th restart and navigate wage garnishment. Millions have been free of benefits garnishment and negative credit reporting for the past five years under a pandemic pause that began under Trump and continued under former President Joe Biden. Now that collections have restarted, borrowers in default can tap into three different options to evade long-term consequences: loan rehabilitation, loan consolidation, or bankruptcy.
Rae Kaplan, a student-loan attorney based in Chicago, told Business Insider that while default consequences were standard before the pandemic, the five-year pause brings extra stress to the collections restart because "a lot of people took this out of their budget," adding that "five years is a long time" to get used to not paying.
"So I think this period where they start ramping up collection activities is going to cause a lot of panic out there for borrowers," Kaplan said. Some borrowers in default previously told BI that they're not confident they'll be able to avoid garnishment.
Here are some options that defaulted student-loan borrowers have to avoid having some of their wages and federal benefits seized.
Loan rehabilitation
Loan rehabilitation can take months, but it has several benefits, including eventual removal of the borrower's default status from their credit reports.
To rehabilitate a defaulted loan, the borrower needs to contact their student loan holder and sign an agreement to make nine payments within 20 days of the due date during a period of 10 consecutive months.
The payment amount is intended to be affordable; according to Federal Student Aid, the payment will be equal to up to 15% of the borrower's discretionary income divided by 12. Kaplan said that it's helpful to hire an attorney or an advocate to negotiate low payments, and it's possible that borrowers can end up with payments as low as $5 a month through this route.
Notably, wage and benefits garnishment will continue during part of the loan rehabilitation process, and the benefits that are seized would be in addition to the agreed-upon rehabilitation payments. Garnishment will continue until the borrower has made at least five rehabilitation payments or the loan is no longer in default.
Additionally, borrowers can only rehabilitate a defaulted student loan once; if the loan defaults again, rehabilitation will not be an option.
"Once we get you rehabilitated, then your credit score will go up," Kaplan said. "So it's a nice feature that you can both get back to current and in good standing, get your loans back into good status, and get that negative credit removed from your credit report."
Loan consolidation
Consolidating a defaulted student loan is quicker than rehabilitation, but the record of the default will remain on the borrower's credit history.
Borrowers can apply with Federal Student Aid to consolidate their defaulted student loans into a federal direct consolidation loan. To be approved for consolidation, the borrower must agree to pay off the consolidated loan under an income-driven repayment plan or make three consecutive, on-time, full monthly payments before consolidating.
After the loan is consolidated, the borrower can make use of all federal student-loan benefits, including deferments, forbearances, and loan forgiveness.
Bankruptcy
If a defaulted borrower does not think that consolidation or rehabilitation is feasible, they can file for bankruptcy.
Dustin Baker, an Iowa bankruptcy attorney, told BI that filing for bankruptcy is "a very efficient way" to stop wage and benefits garnishment because once a bankruptcy petition is filed, creditors are no longer allowed to contact and collect from the borrower.
"If nothing else, it's kind of a four or five-month break to figure out what to do," Baker said, adding that he's already received an increase in requests from borrowers worried about collections on defaulted student loans.
Prior to 2022, student-loan borrowers had to clear a high and burdensome threshold to discharge their loans in bankruptcy. However, Biden issued new guidance in November 2022 to streamline the process, and Baker said he's had much greater success discharging borrowers' student loans in recent years.
"It seems like it's moving more quickly now," Baker said. "They've allocated the appropriate resources, and it's not a partisan thing. Biden started this process, Trump reaffirmed it, and it sounds like the administration at least is providing the appropriate resources to make it happen."