Eliza Haverstock, Nald Wallet
After a five-year suspension that began in March 2020, the Trump administration has reverted its default collection machine for student loans. Millions of borrowers with default loans are poised to face serious consequences starting Monday, May 5th.
“By reopening the collection, taxpayers will protect borrowers from being responsible for the costs of federal student loans they are willing to take on to fund post-secondary education,” the Education Department said in a press release.
The broad outcome of student loan defaults can hit borrowers at once. The government can withhold some of the Social Security checks, receive tax refunds and decorate their pay. Your credit score will plummet, making it difficult to buy a house, rent an apartment or get a job. Borrowers cannot increase their student loans to return to school or access loan relief options. Potential costs include court and collection fees.
If it’s the default, take the action now. I want to keep the damage as low as possible. Unlike other forms of consumer debt, there is no law restricting federal student loan obligations, says Michele Zampini, senior director of affordable prices at the College Access and Success Institute (TICAS). This means that the government can collect debts indefinitely.
“Borrowers know they want to pay off their loans, but in many cases they just met this truly confused Byzantine system that is difficult to navigate your options and makes it difficult to understand your options.”
Here’s how to know if you were affected and what options to navigate the defaults:
Who is affected now?
More than 5 million borrowers are facing a collection that reopened in early May, the department said. Currently, when pandemic payment suspensions have begun and remain at default today, only borrowers with student loans already at default will be affected, experts say.
If you’re a few months behind in your student loan payments, or if you haven’t started paying again since the pandemic suspension ended, you’re not yet affected. However, a loan may be considered arrears. If you have passed more than 90 days, delinquency may be reported to the Credit Bureau. Federal student loans are the default after missing a 270-day payment.
The Student Loan On Ramp ended on September 30, 2024, and the watch resumed with missed payments. In late June or July, these late accounts begin to default. At that point, almost 10 million borrowers could default. According to the education department, nearly one in four people with federal student loans.
“If you’re receiving monthly student loan invoices from a company like Mohela, that means you’re not the default yet,” says Mike Pierce, executive director and co-founder of the Student Borrower Protection Centre (SBPC). “You may have been late. You may have received a letter saying you need to pay, but there is no default yet.”
Don’t know if this applies to you? Log in to your dusttainid.gov account. If student loans are the default, then the red banners that direct you to the default resolution group, the default federal student loan servicer, says so. (If you default on FFELP student loans, you can work with the guarantee agency instead.)
If you are in default, the education department must give 60 days’ notice before sending any obligation to the Treasury’s offset program. The Treasury can begin withholding some of the government’s payments, such as social security checks, tax refunds, and private government pensions. Your loan holder can order your non-government employer to fork up to 15% or more of your salary. According to the education department, the process could begin “late this summer.”
Two main methods outside the default
If you have a student loan default, the debt will be transferred from the regular repayment service system. It “enters into something like “strange land” of the repayment system,” Denten said.
There are different rules in this world of “Bizarro.” Instead of working with older servicers, you might work with default resolution groups. Your entire balance will be due, and you won’t be able to access typical relief options, such as income-driven repayments and tolerance.
Most borrowers are unable to pay the balance in full. There are two other routes to end student loan defaults, stop collections, and re-enter into your regular repayment system. Start one of the processes by contacting the loan owner, which is probably the default solution group.
Rehabilitation. You agree to your loan holder and decide to make nine monthly payments for 10 consecutive months. Payments are usually based on income and family size. After making these payments, your loan will be returned to good condition and you will have access to regular repayments and relief options. Collection costs under rehabilitation are usually lower than those associated with integration. The default row is removed from the credit report, but payments are either late or missed before the default. Integration. This process requires combining multiple loans into a single federal loan, but typically takes around 60 days. You may need to make several hourly payments first before consolidating. This will restore your loan to good condition and qualify for income-driven repayments, forgiveness of public service loans, and tolerance or postponement. The default mark will remain in your credit report for seven years.
Rehabilitation and integration are both one-time opportunities. If you’re caught up in a re-define cycle and are already integrated with rehabilitation, the options to end the default are very limited, Denten says. In this case, you may need to work with the loan owner to negotiate a repayment plan, but the loan will remain in the default system until it is repaid.
Get help if student loan defaults
Learn about options before contacting the loan owner.
“We recommend that borrowers do their homework,” says Betsy Mayotte, president and founder of the Student Loan Advisor Institute (TISLA). “Many people have a lot of anxiety about this topic and don’t want to make that call to start a pass (from the default), but if they’re educated about what these options are, they feel more confident about it.”
If you need further guidance or think there is an error in your account, consider contacting an elected official who will help you navigate a broken public program, Pierce says. SBPC has online tools to open cases with members of Congress. Non-profits on screened student loans like Tisla are also helpful.
Watch out for student loan scammers who promise to get you out of default in exchange for access to money and financial accounts.
“If someone is asking them to pay to help manage your student loans, regardless of the company, they can instead look for a nonprofit organization like a legal aid group,” Zampini says.
Eliza Haverstock writes for Nald Wallet. Email: ehaversstock@nerdwallet.com. Twitter: @elizahaversstock.
Article Student Loan Default Collection Resume: Knowledge originally appeared in Nerdwallet.
Original issue: April 30, 2025, 2:19pm EDT
