Federal Student Loan Borrowers Face Wage Garnishment and Retirement Benefit Seizure
Resumption of Collection Activity Looms
After a five-year reprieve, federal student loan borrowers who have defaulted on their debt will soon face the consequences of their delinquency. A recent memo from the U.S. Department of Education outlines the plans to resume collection activities, including wage garnishment and Social Security benefit offsets, as early as this summer.
The Scope of the Problem
The number of federal student loan borrowers in default is staggering, with approximately 7.5 million individuals affected. This crisis has drawn comparisons to the 2008 mortgage crisis, highlighting the need for urgent action.
Relief Period Expires
The Biden administration’s 12-month “on-ramp” to repayment, which shielded borrowers from consequences of falling behind on their payments, expired on September 30, 2024. As a result, borrowers in default may see their wages garnished starting in October, while Social Security benefit offsets could resume as early as August.
Strategies to Avoid Defaults
To mitigate the impact of collection activities, the Department of Education is implementing measures to help borrowers stay current on their payments. These initiatives include:
- Making it easier for borrowers to enroll in affordable repayment plans, such as income-driven repayment plans
- Allowing borrowers to authorize the department to obtain their income information from the IRS
- Automatically enrolling borrowers in an income-driven repayment plan if they become 75 days delinquent on their loans
- Screening borrowers for other forgiveness opportunities before they formally default
Incentives for Borrowers
The Department of Education is also exploring options to increase the current interest rate incentive for borrowers who sign up for automatic payments to their student loan servicer. Currently, borrowers can receive a 0.25 percentage point reduction in their interest rate by doing so.
Pathway to Forgiveness
Later this year, borrowers in default will be able to enroll in the Income-Based Repayment plan and have a pathway to forgiveness. This marks a significant shift, as federal student loan borrowers currently need to exit default before accessing income-driven repayment plans.
Protection of Social Security Benefits
The Biden administration has taken steps to protect a higher amount of people’s Social Security benefits from collection powers. As of early 2024, borrowers with a monthly Social Security benefit under $1,883 can protect those benefits from offset, compared to the current protected amount of $750. This change is expected to effectively halt Social Security offsets for more than half of affected borrowers and reduce the offset amount for many others.
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