Education Department Halts Student Loan Collections, But Questions Remain

The Education Department abruptly and unexpectedly announced a temporary halt to collections efforts against borrowers in default on their federal student loans.

“There is a pause on that, at the moment,” said Education Secretary Linda McMahon at a press conference last week. “During the previous administration, I think the whole repayment of loan issue became just so confusing. People just stopped paying. They didn't know if their loan was going to be forgiven or how much of it was going to be forgiven.”

McMahon continued, “We just started collecting again to say, ‘You know you're in default, you don't want this on your credit score.’” 

The Education Department had been expected to issue wage garnishment letters to defaulted federal student loan borrowers as soon as this week. That, along with federal tax refund seizures, now appears to be on hold. But many questions remain.

Here’s a breakdown, and what student loan borrowers should know.

Defaulting on student loans can lead to involuntary collections

Defaulting on federal student loans can have serious consequences for borrowers. In addition to financial penalties, credit damage and the blockage of any new federal aid, being in default can also lead to severe financial repercussions in the form of involuntary collections efforts. This allows the federal government to garnish a borrower’s wages or seize their federal income and benefits, all without a court order.

“If you default on your federal student loan debt, the federal government has powerful tools to collect on the debt,” says the National Consumer Law Center in its Student Loan Borrower Assistance Project blog. “The government may be able to garnish your wages, seize your federal tax refunds, and even take a portion of your Social Security benefits to collect on your student loan debt. If you are in this situation, this does not mean you should give up.”

“Defaulting on a student loan can lead to serious legal and financial consequences,” says the Department of Education on its website. “Your tax refunds and federal benefit payments may be withheld and applied toward repayment of your defaulted loan (this is called ‘Treasury offset’). Your wages may be garnished. This means your employer may be required to withhold a portion of your pay and send it to your loan holder to repay your defaulted loan.”

Halt on collections for defaulted student loan borrowers was unexpected

Before last week’s announcement by Secretary McMahon, there had been no indication that the Education Department was considering pausing collections efforts against defaulted federal student loan borrowers. The department had already started referring defaulted borrowers to the Treasury Offset Program (allowing for the interception of federal tax refunds) and had told some members of the media that the first wage garnishment notices would be sent to borrowers during the month of January. 

Student loan borrower advocacy groups that had previously written to McMahon urging the department to suspend collection efforts celebrated the unexpected news.

“After months of pressure and countless horror stories from borrowers, the Trump Administration says it has abandoned plans to snatch working people’s hard-earned money directly from their paychecks and tax refunds simply for falling behind on their student loans,” said Aissa Canchola Bañez, Policy Director at Protect Borrowers, in a statement on Friday. “Amidst the growing affordability crisis, the Administration’s plans would have been economically reckless and would have risked pushing nearly 9 million defaulted borrowers even further into debt. Earlier this month, a coalition of partners sent an urgent letter to ED urging them to do just this. We are pleased to see they have heeded our calls.”

“Wage garnishment for borrowers in default is a cruel tactic that deepens the cracks in an already broken student loan system while expecting borrowers to hold up their end perfectly,” said Kristin McGuire, President and CEO of Young Invincibles in a statement on Friday. “Forcing collections on borrowers who are already experiencing financial hardship pushes them even further from financial stability and upward mobility. We are relieved to see ED reverse-course on wage garnishment, heeding the call from borrowers and advocates that these punitive tactics cause harm.”

“The pause on wage garnishments and tax refund seizures is an important and necessary first step to mitigate harm to millions of struggling Americans amidst the national affordability crisis. Americans' financial well-being and livelihoods deserve to be protected,” said Natalia Abrams, SDCC President & Founder in a statement on Friday.

Uncertainties remain for federal student loan collections

While the unexpectedly good news may bring relief for borrowers in default on their federal student loans, many questions remain. The relief that Secretary McMahon announced appears to be temporary, and it is unclear how long it will last. 

“While this is a welcome first step, this is only a temporary pause,” said Abrams. “The Department of Education must offer comprehensive student loan debt relief, and agree to stop all collections practices moving forward. No one should ever face the possibility of having their hard-earned wages or tax refunds taken away from them.”

“This temporary pause is the bare minimum,” said McGuire. “Rather than pushing millions of borrowers further into debt, it is essential that the Administration and the Department of Education work toward solutions that recognize student debt as part of a larger affordability crisis facing our nation’s young people. The future success of our country relies on young people to invest in their communities, not forcing them into cycles of financial distress.”

Borrowers should also be aware that the pause only applies to Education Department-held loans. This includes defaulted Direct federal student loans and certain FFEL-Program loans that have been assigned or transferred to the government. Defaulted federal student loans held by guaranty agencies may not be subject to the pause, and these borrowers could still face tax refund seizures or wage garnishment. Those who are in default on their federal student loans may want to use this opportunity to explore options. 

“There are ways to recover even if you have already defaulted and experienced collection,” said the National Consumer Law Center.

Borrowers with defaulted federal student loans can explore programs like loan rehabilitation or Direct Loan consolidation, which can allow borrowers to get their loans out of default and back into good standing. Administrative loan discharge, such as on the basis of a medical disability or school misconduct, can be another avenue for relief. All options will likely have potential benefits and drawbacks for student loan borrowers, so it is important to carefully evaluate your options before deciding on a course of action.