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As the federal government resumes collections on defaulted student loans, millions of Americans risk having their wages garnished, tax refunds withheld, or even Social Security benefits seized. So how do you manage this situation?
After a five-year pause on collections due to the COVID-19 pandemic, the return to enforcement marks a serious shift for borrowers who are behind on payments as Donald Trump and the Republicans return to the White House.
Student loan repayments were suspended in March 2020 as part of an emergency response to the pandemic's economic fallout. Now, with collections officially restarted earlier this May, borrowers in default must prepare for significant financial consequences.
According to the U.S. Department of Education (DOE), over five million individuals are already in default, meaning they haven't made payments in more than 360 days. An additional 4 million are in late-stage delinquency (90 days).
What could happen?
The Trump istration announced on April 21 that the Office of Federal Student Aid (FSA) would resume pursuing defaulted loan balances, beginning May 5, to which the DOE followed up by sending formal notifications would be sent to impacted borrowers.
These notices are expected to be followed later in the summer by garnishment warnings, giving borrowers a 60-day window to act, putting pressure on action to be taken swiftly.
Federal law allows lenders to garnish up to 15% of a borrower's disposable income without obtaining a court order. However, the law does mandate that individuals retain at least 30 times the federal minimum wage per week, which is currently $217.50.
While wage garnishment is the most direct repercussion, borrowers also face the risk of losing tax refunds and government benefits too.
How do I stop wage garnishment?
For borrowers facing default, there are still options to mitigate the damage in wake of the notices being sent by the government to the defaulted and delinquent borrowers in the coming months.
One is loan rehabilitation, which allows individuals to remove their loans from default by making a series of agreed-upon payments. Another route is enrolling in an income-driven repayment (IDR) plan, which adjusts monthly payments based on income and family size.
At the community level, institutions like Ivy Tech Community College (ICC) are helping students avoid reaching this point. They have introduced a financial aid navigator to assist students in understanding their financing options, with the goal of making loans the last resort.
Borrowers are urged to regularly monitor their loan status through StudentAid.gov, where they can explore repayment options and receive personalized assistance. Acting early can make the difference between regaining financial control or facing the consequences of default.
As collections resume and borrowers begin receiving notices, millions of Americans are set for a fall that could bring financial upheaval unless decisive steps are taken to address defaulted student loans.