One Group of Borrowers Gets Relief, But Others Still at Risk: The Latest on Student Loan Collections

The Trump administration this week announced that hundreds of thousands of Social Security recipients would be shielded from student loan collections actions, at least temporarily. The announcement represented a reversal of the administration’s position issued less than two months ago that the Department of Education would resume aggressive collections actions against those who are in default on their federal student loans.

The government has vast powers to collect on defaulted federal student loans and is able to seize or intercept income and benefits under a variety of circumstances to force borrowers to repay their loans. Those powers have largely been suspended since March 2020 due to Covid-19 relief authorized by Congress, which was then extended several times by the first Trump administration and then during all of the Biden administration. But in April, the Department of Education announced that the suspension of collections activities would end, and the more than five million borrowers in currently default on their federal student loans would soon be facing the consequences. 

Here's where things stand following the Trump administration’s latest announcement on student loan collections.

Student loan collections against Social Security recipients paused for now

This week, the Trump administration abruptly reversed course and said that initial plans to seize the Social Security benefits of defaulted federal student loan borrowers would be paused. The Treasury Offset program, run by the U.S. Department of Treasury, allows the government to offset up to 15% of a person’s Social Security benefit amount and apply those funds to a defaulted federal student loan.

“The Department has not offset any Social Security benefits since restarting collections on May 5, and has put a pause on any future Social Security offsets,” said a Department of Education spokesperson, according to media reports. “The Trump Administration is committed to protecting Social Security recipients who oftentimes rely on a fixed income.”

Student loan borrower advocacy organizations praised the announcement, although they noted that this was an abrupt reversal of the administration’s previous position.

“We are pleased to see the Department act to protect struggling older adults and people with disabilities who rely on Social Security to make ends meet,” said Abby Shafroth, co-director of advocacy at the National Consumer Law Center, in a statement on Tuesday. “Seizing money from Social Security benefits would have pushed many people already living on tight budgets into poverty. This is a chance to rethink that approach.” 

“After threatening the financial security of hundreds of thousands of older Americans and student loan borrowers with disabilities, this Administration’s abrupt turn shows what this entire performance was really about: allowing Secretary McMahon to act tough for an audience of right-wing talking heads and Republican donors, even though the government agency she runs remains profoundly broken,” said the Student Borrower Protection Center in a statement.

Other student loan collections actions do not appear to be paused

While the Trump administration’s announcement may be welcome news to nearly half a million defaulted federal student loan borrowers who depend on Social Security for income, that still leaves more than 4.5 million borrowers who are likely still facing imminent collections risks.

The Treasury Offset program not only authorizes the offset of Social Security benefits, but also allows for the offset of other federal benefits. The program allows the government to seize up to 15% of the pay of federal employees, and up to 100% of payments sent to federal vendors and contractors. Treasury Offset also allows the IRS to seize a tax refund owed to a defaulted federal student loan borrower.

The Department of Education also appears to be moving forward with administrative wage garnishment, a separate program that allows the government to order a private employer to withhold up to 15% of the pay of a defaulted federal student loan borrower. That 15% would then be sent to the department and applied to the borrower’s loan balance. All of this can be done without legal action or a court order.

“In addition to ongoing credit score damage and hefty collection fees, the federal government also wields vast extra-judicial powers to collect student debt, including garnishing wages and seizing Social Security payments and tax refunds that are targeted to households with very low incomes, including the Child Tax Credit and the Earned Income Tax Credit,” says The Institute for College Access and Success in a blog post warning of a looming student loan default disaster. “These seizures compound financial hardship for those who can least afford it.”

Related: How to Get Out of Default: What to Know Statutes of Limitations on Student Loans

Millions of additional federal student loan borrowers headed for default

While more than five million borrowers are currently in default on their federal student loans, observers expect many additional borrowers to fall into default in the coming months. Default typically occurs after a borrower is 270 days past due on their loans.

“Only 38 percent of borrowers are in repayment and current on their student loans,” said the Department of Education in a statement in April. “Most of the remaining borrowers are either delinquent on their payments, in an interest-free forbearance, or in an interest-free deferment… More than 5 million borrowers have not made a monthly payment in over 360 days and sit in default—many for more than 7 years—and 4 million borrowers are in late-stage delinquency (91-180 days). As a result, there could be almost 10 million borrowers in default in a few months. When this happens, almost 25 percent of the federal student loan portfolio will be in default.”

Advocacy groups have warned that given the ongoing dysfunction plaguing the federal student loan system, including a backlog of nearly two million applications for income-driven repayment (IDR) due in part to ongoing legal challenges, many borrowers are at risk of falling into default – even those who are doing everything they can to keep up with their payments.

“This Administration is heading towards a default catastrophe,” said the Student Borrower Protection Center in its statement this week. “The programs that are supposed to help borrowers get out of default and stay out of default have been ravaged by right-wing attacks—which will only get worse if the House reconciliation package passes. Any continued effort to restart the government’s debt collection machine is cruel, unnecessary, and will further fan the flames of economic chaos for working families across this country.”