Student loan defaults are back in Washington’s crosshairs

The US government officially resumed collection efforts on defaulted student loans this week, after a five-plus-year hiatus prompted by the Covid pandemic.

And while borrowers don’t immediately face consequences for being in default—or 270+ days late on payments—the penalties are right around the corner, according to newly published details from the Department of Education.

Some ground rules: The US government has significant collection powers when it comes to federal debts, with the ability to seize defaulted borrowers’ wages, tax refunds, Social Security/disability benefits, and even state lottery winnings. Borrowers can also be sued by the DOJ in some cases and receive an order forcing them to hand over funds directly from bank accounts.

• These penalties have been on hold since March 2020, when student loan repayments were first paused, meaning millions of recent college graduates have never been at risk before.

Time to pay the Uncle Sam-sized piper

All 5.3 million federal student loan borrowers who are currently in default (~13% of all loan-holders) will receive Treasury Department notices “later this summer” that their wages will be subject to garnishment.

• The US government can garnish up to 15% of all disposable income for delinquent student loan borrowers, though they must be left with at least $750/month.
• The Education Department this week also began alerting the ~195,000 student loan borrowers who are in default and receive federal benefits to tell them their benefit checks will be subject to garnishment within the next 30 days.

Big picture: A record-high 20.5% of all federal student loan borrowers with a payment are 90 days or more past due (~10 million people), up from 11.5% in February 2020, per a new report from credit reporting agency TransUnion. Overall, federal loans account for 92% of all student loan debt.