5 million student loan borrowers face mandatory collections starting May 5
Some 5 million Americans with defaulted student loan payments will have their loans sent for collections on May 5, the Department of Education announced on Monday.
Next month, for the first time since student loan payments were paused due to the onset of the COVID-19 pandemic, the Education Department will collect the debts from borrowers who had defaulted -- which means they hadn’t paid their debts for around nine months or 270 days -- before the pandemic.
The announcement comes as scores of Federal Student Aid (FSA) employees have been terminated at the Department of Education as part of President Donald Trump's efforts to shutter the agency, which creates uncertainty for borrowers and the future of the student loan system, according to former Under Secretary of Education James Kvaal.
“The concern is that the department is, you know, cutting the people who would help borrowers make this transition,” Kvaal told ABC News. “Borrowers who are trying to get help by getting into an affordable repayment plan or by applying for loan forgiveness, if they're eligible, you know, just don't have the same resources that they did before the department staff was cut in half.”
The pause -- started in 2020 in Trump's first administration -- for all 43 million student loan borrowers was implemented due to the economic hardship and disruption caused by COVID. This will be the first time in five years the repayments have begun.
Kvaal said defaults can be “tragic” for borrowers. In some cases, Kvaal said, defaults can negatively impact credit scores and future student aid, and several states revoke driver’s licenses over defaults.
However, the department emphasized that its effort will protect taxpayers from shouldering the cost of federal student loans that borrowers "willingly" undertook. Secretary of Education Linda McMahon also said taxpayers will no longer be responsible for the “irresponsible student loan policies” of the previous administration.
“The Biden Administration misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear,” McMahon wrote in a department release. “Hundreds of billions have already been transferred to taxpayers. Going forward, the Department of Education, in conjunction with the Department of Treasury, will shepherd the student loan program responsibly and according to the law, which means helping borrowers return to repayment -- both for the sake of their own financial health and our nation’s economic outlook.”
A defaulted loan is a loan that a borrower hasn't made payments on for 270 days, according to the office of federal student aid. When the loan officially enters default, it becomes eligible for mandatory collections.
The collections on loans are typically done through wage garnishments, a legal procedure in which a person's earnings are required by court order to be withheld by an employer for the payment of a debt, according to the Department of Labor.
Student debt can also be collected through offsetting tax refunds or other federal benefits, which Kvaal said can include one’s Social Security. The collections process starting in just two weeks is blocking these borrowers' path out of default, according to Student Borrower Protection Center Executive Director Mike Pierce. Pierce said the Trump administration is feeding them into the “maw of the government debt collection machine.”
“This is cruel, unnecessary and will further fan the flames of economic chaos for working families across this country," Pierce told ABC News in a statement.
But the administration's efforts to place borrowers into involuntary collections programs will be paired with a comprehensive communications and outreach campaign to ensure borrowers understand how to return to repayment or get out of default, according to the department release.
The news also comes as the administration is working to rehome the $1.6 trillion student loan portfolio to other agencies. Trump announced the loan system would be moved to the Small Business Administration “immediately” during a White House event last month.
After the announcement, Kvaal, who worked in senior roles in the Obama and Biden administrations, told ABC News his higher education portfolio under Obama included moving some loan functions to the Department of Treasury. But he warned shifting the student loan portfolio again could lead to real world consequences.
“We're at a point now where millions of borrowers are late on their student loans,” he said. “For the department to be focused on laying off half its staff and going through a fundamental reorganization of how it administers these programs, you know, in really critical weeks for borrowers who are trying to get into repayment plans or get loan forgiveness, I think it's very dangerous and puts at risk millions of borrowers of going into default on their loans.”
