Student Loans Under Trump: What to Know About the Administration's New Collection Policy

Yahoo

02-05-2025

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Richard Stephen
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After five years of relative federal student-debt relief, the Trump administration has decided to go after the most financially vulnerable debtors. Starting May 5, the Department of Education announced, the Office of Federal Student Aid (FSA) will initiate the collections process for debtors who've defaulted on their student loans.
For context, as of March — the latest publicly available data on the Department of Education website — the country was managing a total of $1.66 trillion in federal student loans burdening 42.5 million people. According to the administration, only 38% of borrowers are currently repaying their student debt on time. Roughly 4 million borrowers are in late-stage delinquency and more than 5 million are in default.
When the Biden administration's Saving on a Valuable Education (SAVE) program was paused earlier this year, some borrowers who were enrolled in the program saw their monthly payments grow exponentially — jumping from $250 to $900 per month, in one instance, and from $500 to nearly $5,000 per month in another, according to a report in Fortune. Some of those borrowers are likely to join the millions of fellow debtors already in default.
Here's what we know.
As a quick refresher, the Biden White House's highly anticipated, sweeping student-debt relief package got struck down by the Supreme Court in 2023, prompting the administration to switch gears to focus on targeted cancellations for specific categories of debtors. Alongside the high-profile SAVE plan, Biden's team spent the administration's last years making improvements to Income-Driven Repayment (IDR) options and Public Service Loan Forgiveness (PSLF).
In July 2024, federal judges blocked major portions of the SAVE plan after challenges were filed by Republican attorneys general, leaving in limbo nearly 8 million borrowers enrolled in the plan. The Biden administration appealed the ruling. Still, by December, the Department of Education announced the administration had successfully cancelled a total of nearly $180 billion in student loans for 4.9 million borrowers using its targeted relief method.
Biden's last public action on student debt relief came on January 13, when the White House announced that it had approved relief for more than 150,000 borrowers, including 85,000 debtors defrauded by their schools; 61,000 debtors with permanent disabilities; and 6,100 debtors who work in public service.
So, for those keeping count at home, since announcing its debt relief package in 2022, the Biden administration said it was able to cancel about 11% of the country's total federal student-debt burden (about $180 billion) and totally eliminate federal student debt for around 11.7% of borrowers (about 5 million debtors) during Biden's time in office
Within weeks of taking office, President Donald Trump began moving forward with his plans to shutter the Department of Education and subsequently laid off about half of the agency's workforce, according to the New York Times. Biden's SAVE plan had already been paused on appeal since the previous summer, but in February, it was essentially blocked indefinitely when a US court of appeals ruled against the Biden administration program. The Trump administration then removed the application for the program from the Department of Education website entirely. Applications for other IDR plans also reportedly disappeared.
Weeks earlier, the Department of Governmental Efficiency, or DOGE, reportedly temporarily gained access to the Department of Education's databases and personal information for millions of student loan borrowers — before a federal lawsuit stopped the exchange. A separate March lawsuit filed by the American Federation of Teachers forced the administration to reopen the online applications.
The Trump administration has offered mixed signals on which agency will even handle the outstanding federal student-debt balance. In March, White House Press Secretary Karoline Leavitt told a group of reporters that the Department of Education would handle student loans and Pell grants; the very next day, Trump told reporters that the Small Business Association would do so instead. As of now, it appears the FSA will be leading the process.
Republicans in the House of Representatives just released a proposal for student repayment that would, as a stipulation of the policy, repeal the SAVE plan. Called the Student Success and Taxpayer Savings Plan, the proposed policy reduces the number of payment plans for the country's millions of debtors down to just two options. The first plan would offer a fixed monthly bill over the course of repayment and the second plan, called the Repayment Assistance Plan (RAP), would be an income-driven repayment plan. According to the proposal, RAP would 'prevent balances from always ballooning,' though the details of how that would be avoided aren't provided. The proposal would also limit the maximum amount of federal student loans for undergraduate students and for Parent PLUS loans at $50,000. If enacted, this proposal would only apply to student loans taken out after July 1, 2026.
So far, the administration's actions have matched early plans and intentions outlined in the infamous Project 2025 agenda, but it has yet to implement the document's most destructive student debt-repayment mechanisms: namely, replacing both Biden's SAVE plan and the existing PSLF plan with a far more restrictive and punishing IDR program. As described, Project 2025 proposes reducing the minimum annual income-level requirement for a single person to make student debt payments from $34,000 in the SAVE plan to just $15,000. SAVE's promise to cancel or cover extra unpaid monthly interest above minimum payments in exchange for on-time payments would also be eliminated, meaning rogue interest rates could come back with a vengeance.
In addition to nixing PSLF and other 'occupation-based student loan forgiveness' programs, Project 2025 would void any 'time-based' progress, meaning that borrowers who've made monthly payments for a certain number of years to eventually earn full cancellation would lose that benefit completely.
In its press release announcing the collections process, the Department of Education mentions 'an enhanced Income-Driven Repayment (IDR) process,' but additional details are forthcoming.
If you've already defaulted on your federal student loans, the Department of Education offers two options for you to get out of default: loan consolidation and loan rehabilitation. In both instances, borrowers are eligible to apply for deferment and forbearance periods, rehabilitation plans, loan forgiveness programs, and new federal student aid once the process is completed. But, according to the StudentAid.gov website, there are a few key differences to consider.
Loan consolidation: This process allows borrowers to combine all of their existing federal loans into one giant loan with one monthly payment, and it's a much faster fix than loan rehabilitation. However, the consolidation process will typically capitalize your existing interest, meaning that your unpaid interest will be added to your principal balance, increasing your overall loan and payments.
The new interest rate applied to that consolidated loan will essentially require you to pay interest on your old unpaid interest. And, unlike the loan rehabilitation process, consolidating your loans will not remove the negative default mark on your credit score.
It is important to note that you cannot consolidate loans that are already being collected through the wage garnishment process. So, if you want to use consolidation on your defaulted loan, the time to move is right now.
Loan rehabilitation: This process takes several months, but outstanding interest is not added to your loan and the record of your default will be removed from your credit history once your loan is again in good standing. For direct loans, for example, borrowers must agree to make nine consecutive monthly payments over the course of 10 months at a 'reasonable and affordable' monthly rate determined by your loan holder. For loans held by the Department of Education, borrowers have to request the rehabilitation agreement by mail.
Another crucial point: There's a chance the collections process can begin — and can garnish your wages — even while you're making payments through the rehabilitation process. According to the StudentAid.gov website, collections will stop once you've completed the rehabilitation program but might stop as soon as you've made at least five payments.
Before wage garnishment begins, debtors should receive a 30-day notice that the collections process will begin impacting their income. So, in theory, if the collection process the Trump administration is threatening does begin on May 5, your income shouldn't be affected until 30 days after you've been notified.
That said, the Education Department's own announcement states the FSA won't begin sending these notices until 'later this summer.' After you get that notification, you can enter a repayment agreement, you can file a request for a hearing, and file a formal objection to the garnishment process.
By entering a repayment agreement and making a first payment before the 30 days is up, you might be able to prevent the wage garnishment process from starting at all. Once it begins, the Department of Education can direct your employer to take up to 15% of your take-home pay and give it to the government.
Originally Appeared on Teen Vogue
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