Millions of Americans with federal student loans will see a significant change to how those loans are collected starting May 5.
For the last five years, because of the COVID-19 pandemic, the government paused collections on student loans in default. Now, the Treasury offset program will be reinstated by the Department of Education, allowing the federal government to withhold taxes, social security payments, and other federal benefits to recover unpaid student loans.
Elaine Rubin, the director of corporate communications at Edvisors, said borrowers who have been making their payments and have been in repayment according to the terms that they’re being held to at this time are not going to be affected by this change.
“It’s going to be those borrowers who are actually in default or in a defaulted status on those federal student loans,” she said. “Defaulting on a federal student loan could be missing a payment for anywhere from 270 days to 360 days, depending on the type of loan. So that’s a borrower who has fallen significantly behind, because that’s essentially about nine months to a year.”
However, Rubin said she recommends people double check the status of their loans since there have been a lot of policy changes over the last five years.
“There’s been a lot going on since the COVID-19 pandemic relief, in some of the programs through the Biden administration that have carried over to the Trump administration,” she said.
“So some borrowers may not be keeping up to date with the status of their federal student loans. Now it is the responsibility of the borrower to do that, so the recommendation is always to go to studentaid.gov to get an idea of where you are if you’re not sure.”
Rubin said the forms of involuntary payment being introduced in May — from withholding tax refunds and social security to garnishing wages — are not new.
“They had been in practice routinely in the past, but with the pandemic relief, a lot of these collection efforts were put on hold,” she said. “They’re different tools used by the department to collect on those defaulted loans…
We anticipated this to happen at some point. Borrowers in default have not been collected on for several years. Many borrowers have not referred to collections just because of the different types of relief efforts out there. So we did expect this to happen at some point.”
Secretary of Education Linda McMahon said part of the goal is to remove the burden of the defaulted loans from the taxpayers.
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Rubin said there are about five million borrowers in default nationwide, and another four million in late stage delinquency at high risk of going into default.
“It’s a challenging time right now. People are struggling with just making the payments on what they need to get by – housing, food, gas, transportation, those types of things. And then this is another thing that’s going to affect their overall budget, making it more challenging,” she said.
“We’ve seen different programs through the Biden administration, things like Fresh Start, to help people get out of default, and hopefully those borrowers remain in good standing. But we already expect a significant portion of those borrowers to default again, just because unfortunately, when it comes down to it, once you default on a federal student loan, even if you get back into good standing there’s a high risk for it happening again.”
Rubin recommended everyone with outstanding student loans log on to StudentAid.gov to get a better sense of the status of their loan and who to contact with questions.
