How to prepare for default student loan collection: NPR

The Trump administration says it will soon resume its default student loan collection for the first time in five years, raising doubts and concerns to millions of borrowers across the country.

The Department of Education announced Monday that the Federal Student Aid Agency will resume collections on May 5th. This means that you can take the borrower's tax refunds, Social Security benefits, and ultimately your wages.

“Together, these actions benefit both borrowers and taxpayers by repaying their federal student loan portfolio into repayment,” Education Secretary Linda McMahon said.

The change will affect 5.3 million borrowers who defaulted before the pandemic, according to the Department of Education. Technically, if the loan payment fails for at least 270 days, the borrower will be considered by default.

More borrowers may be in arrears on payments and are heading towards default. Data provided to NPR by the department shows that 2.9 million borrowers are 61-90 days behind in loan payments. According to the department, another 4 million people are in “late delinquent” and reported to the credit department, and are quickly approaching default.

“Most borrowers… they're not at risk for delinquency today, but in five months, they could be,” says Scott Buchanan, executive director of the nonprofit trade group Student Loan Service Alliance. “And taking what you do today is very important.”

In a press release Monday, the education department said it would send a pay decoration notice “later this summer” to seize up to 15% of the borrower's disposable income. In the meantime, it is urging default borrowers to start paying monthly or register with an income-driven repayment plan.

“It makes perfect sense for people to be scared, confused and overwhelmed by the prospect of paying hundreds or thousands of dollars in a month they don't have,” says Mike Pierce, executive director of the Student Borrower Protection Center.

Many families are already struggling to pass in today's turbulent economy, especially as they make many products more expensive. Plus, he says that families with student debt may soon begin to see their pay and part of their Social Security disappear.

NPR spoke to experts about borrowers' options and the consequences they may face as collections resume. Here's what you need to know.

Why does the collection restart?

Eight million federal student loan borrowers defaulted when the pandemic and the resulting recession began. The first Trump administration announced in March 2020 that it would suspend its default student loan collection for at least 60 days.

“By mid-2020, no one will undermine their credibility. No one has seized their salaries. No one has stopped their public benefits,” Pierce adds. “And that's where things have been going on for about five years now.”

The Biden administration tried to succeed in allowing federal student loan debt, but repeatedly extended a moratorium on federal student loan payments until October 2023.

Betsy Mayotto, president of the Student Loan Advisor Institute (TISLA), says that the Trump administration has not created new policies.

“They were always trying to start collecting these default loans again, and that was a matter of when the switch would turn over,” she says. “The Department of Education has requirements to collect these obligations, which owes to US taxpayers.”

Mayott says her nonprofit is now hearing from many panicked borrowers who have been settled in false sense of security — they either mistakenly thought the loan was allowed, or the restrictions law has expired.

“Now, the (a) restrictions law applies to other consumer debts,” she said. “However, there is no federal government law restricting student loans.”

The Trump administration, which opposes the forgiveness of a wide range of student loans, says it is taking this step to ease the burden on American taxpayers.

“The students and parent borrowers, not taxpayers, must pay back the student loans,” the Ministry of Education said. “There is no forgiveness for large loans.”

How can you tell if it has been affected?

The Ministry of Education said it would reach out to all default borrowers through email and social media posts by May 5th, “providing resources and support to remind them of their obligations and help them choose the best repayment plan.”

You can also check your status by logging in to the Ministry of Education's website dusttainid.gov.

The online dashboard shows a warning message that says how much they are liable, who they pay each month, and, if they are defaulted, that's what they are. It is also a place where you can check your email and physical address to be up to date.

Student loan servicers such as Mohela and Aidvantage can also provide clues.

“If you're receiving an invoice from a student loan servicer, that means you're not the default and you won't face forced collections in the summer,” Pierce says.

The loan servicer also sends multiple notifications via email, snail mail, or phone.

“Don't ignore notifications, don't ignore phone calls,” he says. “There's probably a solution that allows you to meet you where you are. That's certainly better than delinquency and entering default.”

What are my options if I'm the default?

There are three main ways people can get out of default. The fastest, but most difficult, is paying off the loan completely.

“If people can pay the loan in full, they probably won't be the default,” Mayotto says. “This is not a really option for most borrowers in this situation.”

The other two methods are loan consolidation and rehabilitation.

Mayott says that the faster of the two is faster. This includes repaying your default loan with new terms of repayment. The fact that it was defaulting from the credit report will not be removed, but it is subject to the low payment option.

For loan rehabilitation, borrowers usually need to pay multiple on-time (usually 9) on-time for an amount based on their income. Once they are paid, the loan is removed from the default and the default line is removed from the person's credit report.

To make the issue even more complicated, around 8 million borrowers are still waiting to find out if their repayment plans are legal. The Biden Administration's plan known as Save is based on individual monthly student loan payments on how much money they make, is currently tied to court.

“It's all happening at the same time that Secretary McMahon is about to reopen his debt collection machine,” Pierce says. “So I'm worried that borrowers don't have the full option as they can afford to buy payments and have no choice but to sit still and see Social Security seized and pay decorated.”

Which resources are available?

This announcement comes at a dizzying time for the Ministry of Education. The Department of Education has been cut in half amid the Trump administration's mass layoffs. The Trump administration has said the student loan program will move to the Small Business Administration, which plans to cut the workforce by more than 40%.

All the confusion and downsizing can make it even more difficult for borrowers to navigate the loan.

“The layoffs have affected a lot of what I call 'helpers',” Mayotto says. “And with everything else going on, the loan servicers are really overwhelmed too. So it's very common for borrowers to have long grips when reaching out to normal resources.”

She says there are many alternatives, such as advocates from certain states and the ombudsman, and online information from nonprofits and other reliable sources.

Buchanan encourages borrowers to use loan calculators on the Federal Student Aid website to get a rough estimate of what monthly payment and interest options will look under different repayment plans and choose the one that's best for them. He then says they can go to the loan servicer's online portal and do the actual math.

He wants people to know that there is a way to lower monthly payments – especially when they lose their job or are in extreme financial distress, such as postponing financial difficulties. Furthermore, he says people can change their repayment options as things change.

“The most important thing for people to achieve is that the federal student loan program is probably one of the most flexible programs that exist when you borrow money,” he says. “So take advantage of it. It's part of the government program. It's part of the profit.”

NPR's Cory Turner contributed the report.