Government officials revealed that the collection of defaulted student loan payments, suspended during the COVID-19 outbreak, would recommence next month. The announcement signifies an end to the leniency era fostered amidst the pandemic. Since March 2020, not a single defaulted federal student loan had been forwarded for collection. Currently, an enormous 5.3 million defaulters on their federal loans are in dire straits.
Previous unsuccessful bids, made by the Education Department, intended to liberally forgive these student loans have been met with legal obstacles. “With this new rule in place, taxpayers will not be burdened with acting as collateral for imprudent student loan policies,” stated Linda McMahon, the Education Secretary. She further added that the regulations punish the many responsible borrowers, while concessions seem to be exclusively lavished upon the irresponsible minority.
From the 5th of May, involuntary collection will be applied through the Treasury Department’s offset program. This program temporarily holds government handouts – comprising tax returns, federal wages, and supplemental benefits – from those with lapsed loans to Uncle Sam. As an extension of this, defaulters will start experiencing wage garnishment after due notice of 30 days.
The deliberate strategy of thrusting debt into collections has been met with significant backlash from advocates. They argue that the rapidly changing rules on student loans have left borrowers in a state of bewilderment. Mike Pierce, Executive Director of the Student Borrower Protection Center, voiced his disapproval at the policy describing it as ‘inhuman, pointless, and another trigger for financial turmoil for working households countrywide’.
As the clock ticks towards looming deadlines, borrowers are apprehensively readying themselves for financial obligations that lay ahead. An initial respite during 2020 saw federal student loan payments and accruing interest put on hold, providing temporary financial relief for beleaguered students. This payment holiday was further extended multiple times through 2023, with the final grace period concluding in October 2024.
The reimposition of this financial obligation meant that a vast number of Americans were once again burdened with repayment commitments. Adding to this, those who fail to make scheduled loan payments for nine continuous months slip into default. This dreaded status not only features on their credit reports but also instigates a collection process. Of all loan recipients, fewer than 40% are currently up-to-date with their loan repayments.
In the wake of increasing unemployment rates, students have struggled to obtain responses to their inquiries, even when these pertain to loan repayments. Remarkably, crucial questions about some income-contingent reimbursement packages remain unanswered following a court ruling in February. The ruling blocked some payment strategies, leaving students in limbo.
Moreover, beneficiaries of the more generous SAVE Plan are caught in a disastrous cycle of forbearance. Despite a seeming reprieve from making payments, these borrowers continue to accrue interest, spiralling further into debt. For defaulters, breaking free from wage garnishment can only be achieved through loan rehabilitation – a route many scarcely understand or know how to navigate successfully.
Unfortunately, for borrowers aiming to avoid wage garnishment, loan rehabilitation is no casual feat. Borrowers must specially request their loan servicer to enrol them in such a program. When approved, they must then adhere to punctual payments for nine consecutive months to escape the shackles of loan default. And if they slip-up – there are no second chances. This one-time opportunity of loan rehabilitation is yet another testament to the department’s lack of flexibility.
Despite the ruthless severities of the enacted policies, over 5 million borrowers have seen their loans cancelled following an umpteenth rejection of the suggestion for sweeping loan mitigation by the Supreme Court. A colossal total of $183.6 billion in student loans has been absolved through extended forgiveness schemes.
Education Secretary McMahon, however, has objected to the cancellation process, stating it has considerably crossed the line. She expressed that future collaboration between the Department of Education and the Department of Treasury would ensure that borrowers return to inflight repayments. According to McMahon, this is essential both for the financial wellbeing of the debtors and for the overall economic future of the nation. Although, one could argue, under the mentioned conditions, the rubric of an ‘economic future’ is rather grim for these burdened students.