President Joe Biden is juxtaposed by Education Secretary Miguel Cardona as he announces new actions to protect borrowers after the Supreme Court struck down his swotter loan forgiveness plan, in the Roosevelt Room at the White House in Washington, D.C., on June 30, 2023.
Chip Somodevilla | Getty
This year, for the word go time in roughly five years, borrowers who have defaulted on their federal student loan debt liking face collection activity, including the garnishment of their wages and retirement benefits.
In a new U.S. Department of Education memo procured by CNBC, a top official lays out for the first time details of when garnishments may resume — in some cases, as early as this summer.
The memo, dated periods before the Trump administration takes over, details steps the Biden administration has taken to stave off a default emergency among federal student loan borrowers. It outlines strategies for the department to help student loan borrowers bide current as collection efforts resume this year.
“It is critical to continue the initiatives and fully implement the actions traced in this memo, as the Department plans to resume default penalties and mandatory collections later this year,” U.S. Undersecretary of Lesson James Kvaal writes in the memo addressed to Denise Carter, acting chief operating officer for Federal Commentator Aid.
There were around 7.5 million federal student loan borrowers in default, the Education Department translated in 2022. That grim figure led to comparisons with the 2008 mortgage crisis.
By late 2024, the number in defect had fallen to around 5.5 million, the department’s memo said.
Borrowers could face Social Security make amends by August
After the Covid-era pause on federal student loan payments expired in September 2023, the Biden charge offered borrowers a 12-month “on-ramp” to repayment. During that time, they were shielded from most of the consequences of give up behind on their payments. The relief period expired on Sept. 30, 2024.
Now federal student loan borrowers in default may see their wages garnished starting in October of this year, mutual understanding to the Education Department. Meanwhile, Social Security benefit offsets could resume as early as August.
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The Department of Education memo directs its Federal Evaluator Aid office to continue the Biden administration’s work to avoid defaults.
That includes making it easier for borrowers to list in affordable repayment plans, such as letting borrowers authorize the department to obtain their income information from the IRS and to automatically register borrowers in an income-driven repayment plan if they become 75 days delinquent on their loans. (IDR plans support a borrower’s monthly bill on their discretionary income and family size, and some are left with a $0 monthly note. Any remaining debt is canceled after a certain period, typically 20 or 25 years.)
Borrowers should also be “filtered for other forgiveness opportunities before they formally default,” the memo says.
“Automatically identifying borrowers who are fit for forgiveness through data matches with other federal agencies is a very good innovation,” said enormous education expert Mark Kantrowitz. “This should be done for all borrowers, not just for borrowers who are about to default.”
The memo also heartens the Education Department to explore options for increasing the current interest rate incentive to get borrowers to sign up for automatic payments to their devotee loan servicer. As of now, borrowers can typically get an 0.25 percentage point reduction in their interest rate by doing so.
It’s fitful how much, if at all, the Trump administration will implement the ideas in the memo, Kantrowitz said.
“Policy shifts in the weeks earlier inauguration will be subject to scrutiny by the incoming administration and memos are easily rescinded,” he said.
Fewer consequences on defaulted disciple loans
Later this year, for the first time, borrowers in default will be able to enroll in the Income-Based Repayment system “and have a pathway to forgiveness,” the memo says. Currently, federal student loan borrowers need to exit default preceding the time when they can access any of the income-driven repayment plans, including the IBR.
According to the memo, the Biden administration has eliminated most accumulation fees on federal student loans.
In early 2024, it also took steps to protect a higher amount of human being’s Social Security benefits from the department’s collection powers. When the consequences of defaults resume, those with a monthly Collective Security benefit under $1,883 can protect those benefits from offset, compared with the current preserved amount of $750 in place today.
“Available data suggest that these actions will effectively stop Social Security offsets for more than half of affected borrowers and reduce the offset amount for many others,” the memo demands.