University of Maryland and national finance experts are urging students to keep tabs on their federal student loans and utilize financial aid resources after the U.S. Department of Education announced it will resume collection on defaulted loans.
The defaulted loan collection process, which is set to begin on Monday through the offset program, allows the education department to begin “involuntary collection” from borrowers in default, according to the Associated Press. Depending on the type of loan, borrowers can go into default after failing to make payments on a loan for 270 days.
But the involuntary collection process only applies to borrowers with federal student loans. According to the Federal Student Aid office website, terms for private loans — such as from a bank or credit union — are determined by the individual lenders who administer them.
According to Ella Azoulay, a research and policy analyst at the Student Borrower Protection Center — a nonprofit organization that advocates for student loan debt cancellation — involuntary collection on student loans comes in two forms: garnishing wages and withholding government-issued benefits.
Wage garnishment happens when the government takes up to 15 percent from a borrower’s paycheck and redistributes it to pay off their student loans, according to the U.S. Treasury Department’s website.
But the education department usually starts by withholding benefits, including social security payments and tax credits, from people with overdue payments through the treasury department’s offset program, Azoulay added.
Azoulay, who investigates companies and governments suspected of harming student loan borrowers, said the Trump administration’s decision to resume collection on defaulted loans will have “disastrous” impacts for borrowers and the national economy.
“It just makes everything else more expensive, more dangerous, more risky,” she said.
[Here’s a look at Trump’s recent executive orders targeting education]
Defaulted loans also affect borrowers’ credit scores, which could prevent them from renting an apartment, obtaining insurance or taking out other loans, according to Elinda Kiss, an associate clinical finance professor at this university.
The federal government stopped collection on all defaulted student loans in March 2020 in an attempt to soften the financial impacts of the COVID-19 pandemic, according to a news release from the education department on April 21 announcing its plan to resume collection.
The collection is intended to protect American taxpayers who shoulder the cost of unpaid student loans after former President Joe Biden’s administration attempted to implement widespread student loan forgiveness in October 2023, education secretary Linda McMahon wrote in the news release.
“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” McMahon wrote.
According to the news release, more than 5 million borrowers are in default on their student loans, and another 4 million are in “late-stage delinquency,” meaning they have not made a payment in 91 to 180 days. There could be almost 10 million borrowers with defaulted student loans in the next few months, according to the news release.
In Maryland, more than 800,000 borrowers owe about $35 billion in student debt to the federal government, according to data compiled by the Student Borrower Protection Center.
Azoulay said the populations most likely to default on their loans are those already facing disproportionate financial hardships, such as Black and brown communities, borrowers older than 65 years old and those who dropped out of school before completing their degree.
[UMD education students remain passionate amid U.S. education department changes]
Although the collection process for defaulted loans begins only after students graduate, it is still critical for them to begin tracking their finances beforehand, said Michael McMillan, an associate clinical accounting and information assurance professor at this university.
“Students need to be proactive right now, finding out how much they owe, arranging a payment schedule and saving or making a budget, which incorporates the repayment of [their] loans,” McMillan, the co-director of this university’s financial wellness program, said.
The program is holding workshops for graduating students to help them establish plans for loan repayment and retirement accounts, he added.
Kiss also recommends that students prepare for post-graduation expenses as early as possible.
“I tell my students that you should pay yourself first,” she said. “Put some money aside for savings so that when you eventually retire or need money for buying a big purchase, like a house, you have some savings there.”
She also encourages borrowers to take advantage of resources offered on the Federal Student Aid website, some of which focus specifically on managing defaulted student loans.
But according to Azoulay, some people have recently experienced difficulties when trying to connect with federal student aid office workers due to recent staffing cuts at the education department.
Borrowers who are in default should have received an email within the past two weeks from the Federal Student Aid office alerting them of their status and providing them with tools to help them make an action plan for repayment, according to the education department news release.
The Federal Student Aid office will send notice of administrative wage garnishments later this summer.
