On Monday, the US Department of Education announced that it will compel defaulted student loan borrowers into repayment, starting 5th May, by resuming collections, in some cases by seizing federal benefits like Social Security and automatically garnishing their wages.
Furthermore, student loan borrowers falling behind will also see their credit scores go down. US President Donald Trump is bringing back collections on defaulted student loans for the first time in five years.
'Resuming collections protects taxpayers from shouldering the cost of federal student loans that borrowers willingly undertook to finance their postsecondary education,' according to a press release.
Next month, the Federal Student Aid (FSA) office will resume the Treasury Offset Program, which withholds government benefits, including tax refunds, from people behind on payments.
'American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,' stated US Secretary of Education Linda McMahon.
Trump's Step-by-Step Plan to Recover Due Payments
The Department of Education said that all borrowers in default will begin receiving email communications over the next two weeks to help them become aware of the evolving situation and urge them to contact the Default Resolution Group to make monthly payments. The FSA will also offer options to enrol in an income-driven repayment plan or loan rehabilitation.
In the latter half of summer, the FSA will begin sending notices of administrative wage garnishment to defaulted borrowers.
Moreover, the department will also authorise guaranty agencies to begin involuntary collections on loans under the Federal Family Education Loan Program.
'If you are a student borrower with a federal loan balance and haven't been making payments, you must restart payments now,' McMahon said. 'Our Federal Student Aid office is providing every form of assistance we legally can to ensure that a monthly payment can fit into your budget.'
The Administration made it clear that there won't be any 'mass loan forgiveness.'
Over 42 Million People Carry Student Debt
According to the Education Department, 42.7 million borrowers owe £1.19 trillion ($1.6 trillion) in student debt, and 38% are in repayment.
Over five million borrowers are in default, not having made monthly payments for 360 days and some for over seven years. Furthermore, estimates revealed that four million borrowers are in late-stage delinquency.
Overall, the total number of student loan borrowers at risk of default could reach 10 million in the next few months. It would mean nearly 25% of the federal student loan portfolio will fall into default, according to the press release.
However, the New York Federal Reserve estimated that more than 9 million student loan borrowers are struggling with bills and face high risks of delinquency this year.
The impact of withholding government Social Security could prove devastating for seniors who rely on that income to get by. Social Security income happens to be the sole source of income for millions of Americans.
The Social Security Administration estimated 69 million Americans will receive benefits in 2025. According to a Center on Budget and Policy Priorities study, without Social Security benefits, over 21 million more US adults would be below the poverty line.
Note that wage garnishment or reduction of government benefits could impact student loan borrowers of all ages amid the volatile macroeconomic backdrop and rising consumer prices due to elevated inflation.
