Under President Donald Trump, the Department of Education began sending notices to the first of millions of Americans with past-due federal student loans that their wages would be garnished in just a few months. The news comes as the Trump administration begins to send millions of defaulted borrowers to collections.
The garnishments will occur in waves, with the first borrowers receiving pay deductions in early June. Monday, the Education Department began sending 30-day notices to approximately 195,000 defaulted borrowers informing them that they will be subject to the Treasury Offset Program, which collects past-due debts owed to state and federal agencies.
Under this program, the Treasury can withhold funds such as tax refunds, wages, Social Security payments, and disability benefits to pay off delinquent debt.
Later this summer, “all 5.3 million defaulted borrowers will receive a notice from Treasury that their earnings will be subject to administrative wage garnishment,” according to the department’s first enforcement timeline.
The Education Department has not collected on defaulted loans since the beginning of the COVID-19 pandemic. Now that it intends to resume the actions, millions of people’s financial situations may worsen during a period of deep economic uncertainty.
According to a report released Monday by credit bureau TransUnion, more than one in every five borrowers is at risk of defaulting on their loans, a higher rate than before the pandemic.
According to the report, 20.5% of borrowers are 90 days or more behind on their payments, up from 11.5% in February 2020. “The current rate of delinquency represents the highest figure ever recorded,” the headline says. And it might be more widespread than it appears.
When defaulted debt is sent to collections, borrowers may have less money to pay their bills, resulting in increased debt accrual and “significant drops” in credit score. According to the Consumer Financial Protection Bureau, Social Security beneficiaries are especially vulnerable to negative financial and health consequences when their benefits are garnished.
Sen. Kirsten Gillibrand (D-N.Y.) wrote to Education Secretary Linda MacMahon earlier this week, noting the precarious economic situation and asking the Cabinet official to detail an outreach program and other steps the department is taking to mitigate negative financial consequences for everyday Americans.
“Withholding income from borrowers will unnecessarily exacerbate economic strains in local economies while New Yorkers worry about a tenuous economy and potential recession,” according to Gillibrand. “I am concerned that the timing could not be worse for any changes in student loan repayment policies.”
To avoid default, borrowers must repay their loans in full, which the department admits is “not a practical option for most borrowers.” They can also rehabilitate or consolidate their loans.
The loan rehabilitation process, which typically lasts a few months, is determined by the borrower’s loan type and servicer. Wage garnishment may continue until the loan is no longer in default or the borrower has completed at least five rehabilitation payments.
Consolidation saves time, but may result in higher interest payments. Furthermore, borrowers cannot consolidate their loans until the wage garnishment order is lifted.
“To avoid the consequences of default, borrowers in delinquency and default should begin repaying their loans,” says Ellen Keast, a spokesperson for the Department of Education. “A borrower with loans in default can stop Treasury Offset and wage garnishment by entering a rehabilitation agreement and making the first five of the nine required payments.”
The Education Department encourages borrowers to make a payment, enroll in an income-driven repayment plan, or apply for loan rehabilitation before defaulting. Though the Trump administration has fired Education Department employees and plans to dismantle the agency entirely, the agency claims it has increased customer service capacity to assist borrowers.