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Biden administration seeks to avoid default crisis for student loan borrowers as garnishments resume

by admin January 17, 2025
January 17, 2025
Biden administration seeks to avoid default crisis for student loan borrowers as garnishments resume

This year, for the first time in roughly five years, borrowers who have defaulted on their federal student loan debt will face collection activity, including the garnishment of their wages and retirement benefits.

In a new U.S. Department of Education memo obtained by CNBC, a top official lays out for the first time details of when garnishments may resume — in some cases, as early as this summer.

The memo, dated days before the Trump administration takes over, details steps the Biden administration has taken to stave off a default crisis among federal student loan borrowers. It outlines strategies for the department to help student loan borrowers stay current as collection efforts resume this year.

“It is critical to continue the initiatives and fully implement the actions outlined in this memo, as the Department plans to resume default penalties and mandatory collections later this year,” U.S. Undersecretary of Education James Kvaal writes in the memo addressed to Denise Carter, acting chief operating officer for Federal Student Aid.

There were around 7.5 million federal student loan borrowers in default, the Education Department said in 2022. That grim figure has led to comparisons with the 2008 mortgage crisis.

After the Covid-era pause on federal student loan payments expired in September 2023, the Biden administration offered borrowers a 12-month “on-ramp” to repayment. During that time, they were shielded from most of the consequences of falling behind on their payments. The relief period expired on Sept. 30, 2024.

Now federal student loan borrowers in default may see their wages garnished starting in October of this year, according to the Education Department. Meanwhile, Social Security benefit offsets could resume as early as August.

The Department of Education memo directs its Federal Student Aid office to continue the Biden administration’s work to avoid defaults.

That includes making it easier for borrowers to enroll in affordable repayment plans, such as letting borrowers authorize the department to obtain their income information from the IRS and to automatically enroll borrowers in an income-driven repayment plan if they become 75 days delinquent on their loans. (IDR plans base a borrower’s monthly bill on their discretionary income and family size, and some are left with a $0 monthly bill. Any remaining debt is canceled after a certain period, typically 20 or 25 years.)

Borrowers should also be “screened for other forgiveness opportunities before they formally default,” the memo says.

The memo also encourages the Education Department to explore options for increasing the current interest rate incentive to get borrowers to sign up for automatic payments to their student loan servicer. As of now, borrowers can typically get an 0.25 percentage point reduction in their interest rate by doing so.

Later this year, for the first time, borrowers in default will be able to enroll in the Income-Based Repayment plan “and have a pathway to forgiveness,” the memo says. Currently, federal student loan borrowers need to exit default before they can access any of the income-driven repayment plans, including the IBR.

According to the memo, the Biden administration has eliminated most collection fees on federal student loans.

In early 2024, it also took steps to protect a higher amount of people’s Social Security benefits from the department’s collection powers. When the consequences of defaults resume, those with a monthly Social Security benefit under $1,883 can protect those benefits from offset, compared with the current protected amount of $750 in place today.

“Available data suggest that these actions will effectively halt Social Security offsets for more than half of affected borrowers and reduce the offset amount for many others,” the memo says.

This post appeared first on NBC NEWS

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