Millions of Americans who are behind on their student debt may face a financial shock next year: The federal government is expected to start collecting on defaulted loans for the first time since payments were paused during the pandemic.
Though the Biden administration required borrowers to begin making their normal repayments in 2023, it has yet to resume efforts to recover money involuntarily from people with seriously past-due balances. That process can involve garnishing wages, tax refunds, and Social Security benefits, along with formal legal proceedings.
There are approximately 5.6 million former students currently in default, meaning their loans are at least 270 days behind on payment, who could be immediately affected when collections crank back into gear, according to Department of Education data. That number has remained stubbornly high despite years of efforts by Biden officials aimed at helping troubled borrowers get up to date on their debts.
Policy experts and advocates who work directly with borrowers told Yahoo Finance that they are worried many of those individuals could be caught off-guard when the government’s debt collectors come calling. That’s because people in default tend to be lower-income individuals who often don’t fully understand the terms of their loans or repayment options.
“Some defaulted borrowers may think things have cleared up, that they’ve hit a statute of limitations or their debts have been forgiven, or don’t really know why their loans haven’t been collected over the last four years,” said Tia Caldwell, a senior higher education policy analyst at New America. “The worry is that people think their debt is cleared up and that they’re going to be in for a rude awakening.”
The White House said in October that it would not begin pursuing debtors in default until sometime in 2025, but it has not set an official start date. With Biden’s term winding down, it’s widely expected that he will leave the tricky task of revving up those collections to President-elect Donald Trump and his nominee to lead the Department of Education, former WWE CEO Linda McMahon, who has yet to weigh in on the issue.
“It seems likely that … McMahon will inherit a student loan system where she will have to turn wage garnishment back on,” said Mike Pierce, executive director of the Student Borrower Protection Center. “That’s an affirmative decision the Trump administration is going to have to make.”
The relatively high rate of default on student loans has long been a source of frustration for education policymakers. In 2019, about 10% of debtors had fallen into default within three years of starting repayment — down from years past but still vastly higher than the delinquency rates on mortgage or auto loans.
For borrowers, there’s little upside to defaulting since the debts are hard to discharge in bankruptcy and the government can use legal tools like wage garnishment to eventually claw back its money. Those in arrears are frequently forced to pay expensive additional fees to collections agencies and usually face damage to their credit scores, among other serious consequences. Also, the experience can become a long-term trap for borrowers, leaving them in a years-long financial limbo.
In theory, defaults should also be easily avoidable, since struggling debtors can sign up for an income-driven repayment program that will lower their monthly bill to $0 if their earnings fall below a certain level.
But defaulters tend to be both some of the lowest-earning and least financially sophisticated borrowers, and many aren’t aware of their options, largely because loan servicers — which sometimes try to save costs by minimizing their time working with each borrower — often fail to adequately explain them.
A recent survey by the Consumer Financial Protection Bureau found that among borrowers who had only used a standard, 10-year repayment plan, 31% did not know they could choose an alternative.
In 2022, the Biden administration launched its Fresh Start initiative, which allowed borrowers in default to return to repayment without facing any penalties. But only 900,000 individuals used the program by the time it ended this October, according to a recent Department of Education report.
“Far and away, I’d say the biggest issue is that borrowers just didn’t know about it,” said Abby Shafroth, the co-director of advocacy at the National Consumer Law Center. “A lot of borrowers might have heard something about it but not necessarily understood the benefits of the program.”
Confusion about the student loan program may have become even more acute in recent years, as the Biden administration’s attempts at student loan forgiveness and his generous income-driven repayment program known as SAVE have been tied up in litigation. Shanna Tallarico, the consumer protection project director at the New York Legal Assistance Group, called it a “baffling” time for borrowers, especially those who could face renewed collections.
“The people who remain in default after the fresh start program … are often the borrowers who are hardest to reach,” she said. “People are going to be very surprised and it’s going to be very harmful, especially to our clients, who are going to have their social security offset, their taxes offset, it’s going to be rough.”
The Biden administration took several steps to limit future defaults as part of its SAVE plan. It would have automatically enrolled borrowers in the program if they fell 75 days late on their balance — capping their payments at between 5% and 10% of their discretionary income or, for those with low enough earnings, zeroing them out.
Whether the Trump administration chooses to embrace a similar policy could determine how many new defaults stack up in the coming years. For now, the president-elect’s plans around student loans are still vague — his campaign did not release formal plans on the subject — but he’s widely expected to roll back some of the Biden administration’s efforts to relieve debt.
Experts also said they would be paying close attention to how debt collectors pursue borrowers in the coming year, given that the government’s contractors have been accused of sloppy and abusive practices in the past, such as illegally garnishing wages.
“We’ll certainly be watching with eyes open to see who’s contacting borrowers, what message they’re being given, and how that’s playing out for people,” said Brian Denton, a senior officer at the Pew Charitable Trusts’ Student Loan Initiative.
In the meantime, some consumer groups are beginning early outreach to borrowers, hoping they can get ahead of a collections push. “If we can reach people and tell them this is something you should pay attention to and we can help you do it, we can help them,” said the New York Legal Assistance Group’s Tallarico.
