The U.S. Education Department is set to refer approximately 5.3 million borrowers with defaulted federal student loans for collections, following a pause that lasted since March 2020 due to the COVID-19 pandemic. This pause included a suspension of payments and interest accrual, which has now ended.
Borrowers in default, like Kat Hanchon from Michigan, are facing significant financial distress. Hanchon, who owes nearly $85,000, expressed anxiety about potential wage garnishment and the challenges of managing her budget. The Department plans to begin involuntary collection efforts on May 5, which may include wage garnishment, tax refund interception, and seizure of Social Security benefits.
A student loan is considered delinquent after a missed payment of 90 days, transitioning to default after 270 days of non-payment. Defaulting has severe consequences, such as impacting credit scores and leading to collections.
For those in default, the Education Department suggests visiting the Default Resolution Group to explore options like making monthly payments, enrolling in income-driven repayment plans, or seeking loan rehabilitation, which can remove a borrower from default after nine consecutive payments.
Forbearance, a temporary pause on payments, is available only for delinquent loans and not for those in default. Borrowers can find their loan status and servicer information through their studentaid.gov account, which should be kept updated to ensure they receive important communications.
Involuntary collections can also affect Supplemental Security Income, as these benefits are classified as income. Additionally, delinquency can significantly damage credit scores, potentially dropping them by over 100 points and impacting future financial opportunities.
While applications for income-driven repayment plans are open, the SAVE program is currently not accepting new applications due to legal challenges. Borrowers can use the loan simulator at studentaid.gov to review their repayment options.
