The Department of Education will resume collections on defaulted student loans on May 5, it said on Monday, warning that borrowers could be referred to debt collectors or enrolled in income-based repayment plans.
The federal government paused repayment requirements on student loan debt in March 2020, in the midst of the coronavirus pandemic. Borrowers whose student loans were in forbearance have not had to make payments since then.
President Joseph R. Biden Jr. repeatedly sought during his administration to bring defaulted student loan borrowers back into good standing, or to erase their debt entirely. Plans to forgive up to $20,000 in loans for millions of borrowers were struck down by the Supreme Court, and a Biden-era repayment plan known as SAVE — which would adjust borrowers’ payment plans based on household size and income — has been frozen by the court since August.
The Trump White House has long telegraphed that no such concessions would be offered for student loan holders under its administration.
“There will not be any mass loan forgiveness,” the Department of Education said in its announcement.
More than 42 million people hold student loans from the federal government, totaling more than $1.6 trillion in debt, the department said. More than five million holders of student loans have not made a repayment in the past year, the department said.
Borrowers who are in default of their student loan repayments will receive an email within the next two weeks informing them of their status and of potential referrals to federal debt collectors, the department said. By the summer, borrowers could see automatic deductions from their paychecks.
Who does this apply to?
The policy applies to all of the more than 42 million people who hold federal student loans, but it will most urgently affect the five million who are currently in default on their payments, as well as four million more borrowers who are in so-called “late-stage delinquency” — or in imminent danger of defaulting. The point at which a loan is considered to be in default depends on the type of loan, according to the Education Department’s website.
Those nine million borrowers could be in danger of referral to a federal debt collection service if their loans are still in default after May 5. Financial experts have warned this could seriously harm borrowers’ credit scores and further burden the country’s strained economy.
What happens if borrowers don’t make repayments?
Beginning May 5, the Education Department will start referring borrowers whose loans are in default to the Treasury Offset Program, a debt collection service run by the U.S. Treasury. Over the next two weeks, notified borrowers will be urged to make payments or to reach out to federal debt relief programs to try and arrange a payment plan.
For loan-holders who are still unable to make payments on their student loans, the Education Department warned that it would move forward with involuntary collections, which could mean defaulted borrowers see automatic deductions from their paychecks to cover their loan payments.
What does this mean for the economy?
Because of the coronavirus-era pause on student loan repayments, many borrowers have been spared the negative effects of falling behind on loan payments. Now, with the Trump administration policy, that will change immediately: Borrowers may see their credit scores plummet, and many more will be at risk of defaulting.
Low credit scores can make it very difficult for people to rent or buy homes, and may force them to use higher-risk lenders for purchases ranging from cars to everyday needs.
A vast majority of student loan debt is held by the federal government rather than by private banks, which makes it less likely to severely alter the economy. Still, it can seriously affect the day-to-day finances of borrowers. Because of the extended repayment pause, many borrowers’ budgets no longer account for loan repayments, and the shock of a sudden additional bill could be severe.
“You’ve gotten people out of the habit of repaying now for the better part of five years,” said Colleen Campbell, who resigned last month as the executive director of the Education Department’s loan portfolio management office. “For some borrowers, several cohorts of them, you’ve never built the repayment habit at all.”
