Market Data 
The U.S Department of Education (ED) announced on Monday that it would resume involuntary collections of defaulted federal student loans on May 5. The announcement means that borrowers who have loans in default could see their tax refunds seized or wages garnished. While many borrowers and advocacy organizations will oppose the move, resuming collections is necessary to incentivize loan repayment. The announcement was never a matter of if, but when.
The current student loan mess
The federal government suspended student loan payments in March 2020 in response to the Covid-19 pandemic; this meant that payments were not due, interest rates were zero, and loans in default were not collected. The government extended the pause several times before it finally lapsed, in effect, in October 2024. Payments have been due for the past six months, meaning borrowers who don’t pay will face consequences.
Yet a staggering number of borrowers are not paying. Just 38 percent of borrowers are in current repayment, down from around 60 percent pre-pandemic. Four million borrowers are more than 90 days delinquent, the threshold at which nonpayment is reported to credit bureaus. Millions more are in a forbearance as they await the outcome of a court battle affecting their repayment plan—but they are also in danger of delinquency when that forbearance eventually expires.
Around five million borrowers are in default. This pool consists entirely of borrowers who were in default before the payment pause took effect. Default occurs after borrowers fail to make a payment for 270 days, meaning not enough time has passed since the pause ended for new defaults to occur. But if delinquencies continue on their current path, ED estimates than 10 million borrowers could end up in default—a quarter of the current loan portfolio.
Restoring incentives to avoid default
No one benefits when borrowers are allowed to default. In addition to collections, borrowers face negative credit reports and lose their eligibility for additional student aid. The government only recovers 65 to 75 percent of defaulted loans on average, so taxpayers lose out too.
If the student loan program is to continue functioning, though, there must be consequences to discourage default. These consequences have been suspended for the last five years, and the result was plummeting repayment rates. Reimplementing the default-collections system was always going to be necessary, and now is as good a time as ever.
ED announced that the Treasury Offset Program, which seizes the tax refunds and Social Security payments of defaulted borrowers, will restart on May 5. ED also plans to reimplement administrative wage garnishment for defaulted borrowers sometime over the summer. Borrowers in default will receive notice of these actions over the next two weeks, so they have the opportunity to rehabilitate their loans and/or enroll in a repayment plan before the consequences take effect. Borrowers may contact the Default Resolution Group to do so.
These moves will only immediately affect the five million borrowers currently in default, who were in default before the pandemic. Borrowers who haven’t made payments for the past six months, but weren’t in default pre-pandemic, still have time to start paying their loans again and avoid collections. Allowing these borrowers a window to avoid default is one benefit of restarting collections now, rather than waiting for the next wave of defaults to hit.
Clear communication with borrowers
One can forgive borrowers for being confused in this moment. The Biden administration was an avalanche of mixed messages: the payment pause was going to end several times, before officials extended it at the last minute; the government was going to offer loan forgiveness, before courts struck it down and Biden tried (and failed) to deliver it another way. Many borrowers report that they didn’t know payments were due.
The new administration hopes to change that. Their press release was clear: “There will not be any mass loan forgiveness.” Education Secretary Linda McMahon didn’t mince words in a Wall Street Journal op-ed: “If you are a student borrower with a federal loan balance and haven’t been making payments, you must restart payments now.”
The announcement also indicated that ED “will conduct a robust communications campaign to engage all borrowers on the importance of repayment.” The agency will communicate with borrowers directly to remind them of their loan obligations and provide resources to get them paying again.
The Department will also restart processing of applications for Income-Driven Repayment (IDR), which allows borrowers to tie loan payments to their incomes. The Biden administration stopped processing IDR applications in August 2024, allowing a backlog of 1.9 million application forms to build up. ED promises more information on this effort next week.
All this is a promising start. But restoring the student loan program to health will require a sustained effort by the Trump administration. Today’s announcement must be the beginning of a campaign to get borrowers paying their loans again. It will take sustained communication and deft management to get us out of this mess.
