The Biden administration has extended a pause on involuntary collections activities for defaulted federal student loan borrowers, providing at least a three month extension of relief.
Millions of borrowers in default on their federal student loans had been shielded from normal collections activities during the Covid-19 forbearance, which began in March 2020 and lasted for three and a half years. During the forbearance, the Education Department was prohibited from engaging in so-called involuntary collections actions against defaulted borrowers which can include administrative wage garnishment, Social Security benefits offset, and interception of tax refunds. These protections were then extended for 12 additional months under the on-ramp and Fresh Start programs.
The temporary relief formally ended in early October, and the department’s vast collections machine was set to resume against defaulted borrowers. But the Biden administration has indicated that borrowers will get another few months of collections protection, providing them with more time to get their student loans out of default, back into good standing, and — if applicable — on track for student loan forgiveness programs.
Student Loan Borrowers At Risk Of Default As Student Loan Forgiveness Challenges Cause Chaos
After the Covid-19 forbearance ended, student loan borrowers were protected from the worst consequences of delinquency and default through the “on-ramp” program and Fresh Start. These initiatives lasted for 12 months.
“To ease borrowers’ transition back to repaying their loans, the Department created a 12-month ‘on-ramp’ to prevent the worst consequences of missed, late, or partial payments, including defaults,” said the Education Department in a blog post last week. “The on-ramp was automatic, requiring no action on behalf of the borrower. The Department also announced the ‘Fresh Start’ action in 2022 to give previously defaulted borrowers the same opportunity to return to good standing.”
But both programs ended earlier in October, leaving borrowers at risk of falling behind on their student loan payments or remaining in default. These initiates concluded just as the federal student loan system is experiencing unprecedented upheaval due to legal challenges seeking to block President Biden’s student loan forgiveness initiatives.
“As the on-ramp has ended, many borrowers continue to struggle with student debts they cannot afford,” noted the department. “We recognize that several evolving court orders have changed the terms of several student loan repayment plans, which affected many borrowers across the country.” In addition, “The Administration is fighting lawsuits brought by elected officials against the SAVE repayment plan and against the proposal to provide further debt relief for tens of millions of borrowers, including those who owe more than they borrowed due to runaway interest.
Biden Administration Extends Student Loan Collections Pause Until 2025
According to Politico, the Biden administration indicated last week that it will not pursue involuntary collections activities against defaulted federal student loan borrowers until early 2025. The timing coincides with the upcoming election, and ensures that borrowers won’t experience the worst consequences of default as millions of Americans begin casting their ballots.
“Involuntary collections will not occur before 2025,” said a White House spokesperson, according to Politico. “Defaulted borrowers won’t see collections until 2025.”
This means that borrowers currently in default on their federal student loans will not experience wage garnishment, offset of their Social Security benefits, or seizure of their federal tax refunds this year. This also effectively gives borrowers additional time to explore their options for getting out of default and back into good standing. Doing so could allow borrowers to pursue certain student loan forgiveness programs if they qualify, such as Public Service Loan Forgiveness.
Defaulted Federal Student Loan Borrowers Could Face Serious Consequences Starting Next Year
But the reprieve is only temporary. Starting next year, borrowers who fall behind on their student loan payments or remain in default will start to experience significant repercussions.
“Borrowers should know that the Department is required to report late or missing payments for most borrowers to the national credit reporting agencies in January 2025, and their loans will enter default – triggering mandatory collections and other consequences in late 2025,” said the department in its blog post. “This means that for most borrowers, delinquent payments are not reported until early January 2025 at the soonest.”
Borrowers who are struggling with their student loan payments have options. These can include postponing repayment through deferments or forbearances, or applying for an income-driven repayment plan. Those who are in default on their federal student loans can no longer utilize Fresh Start, but there are other potential options to restore their loans to good standing, such as Direct loan consolidation or rehabilitation. But time is of the essence.
“Borrowers now have only three months until they face consequences for late payments.” said the department. “Unless borrowers make prompt payment arrangements, the Department is required to attempt mandatory collections, such as withholding tax refunds and federal benefits.”