The Trump administration is clamping down on federal student loan defaults; at the same time, Republican lawmakers in Congress just took a major step to narrow affordable repayment plan options. Taken together, this could mean that millions of borrowers will see substantial cuts to their paychecks in the coming months.
Despite an unexpected collections reprieve for Social Security benefits recipients announced by the Department of Education earlier this week, the broader collections crackdown against student loan borrowers appears to be moving forward. More than five million borrowers are currently in default on their federal student loans and may soon be subject to wage garnishment and federal offset. That figure could jump to 10 million borrowers by the end of the year, according to department officials, as Americans struggle to navigate a repayment plan system facing serious legal and administrative challenges.
Meanwhile, if legislation recently passed by the House of Representatives becomes law, an additional eight million borrowers enrolled in the SAVE plan could be forced to make significantly higher payments under different repayment plans by the end of the year.
Here’s what student loan borrowers need to know.
Defaulted Student Loan Borrowers Face Imminent Treasury Offset And Seizure Of Federal Pay
In May, the Department of Education officially resumed activities to collect on defaulted federal student loans. The government has vast powers to force student loan borrowers to pay under these circumstances, without needing to go through the formal court system.
The department has first initiated Treasury Offset for approximately 5.3 million borrowers. Treasury Offset allows the U.S. Department of Treasury to forcibly intercept federal income streams before they can reach a borrower’s bank account. For example, the government can garnish up to 15% of federal employee wages, and can seize up to 100% of payments owed to federal contractors and vendors. The government can also intercept up to 100% of a federal tax refund, and offset up to 15% of Social Security benefits, although Social Security offset is now temporarily paused following this week’s announcement.
The department began sending Treasury Offset warnings to defaulted student loan borrowers last month. Once a borrower receives an official notice prior to Treasury Offset, they have a brief window of time (typically 60 days) to take steps to avoid offset. This can include requesting an administrative hearing to dispute the debt or requesting an exemption based on financial hardship; getting out of default through federal default resolution programs like student loan rehabilitation or Direct loan consolidation; filing for bankruptcy; or applying for an administrative discharge if eligible.
Wage Garnishment Against Defaulted Federal Student Loan Borrowers Begins Soon
The next step the Department of Education will take against defaulted federal student loan borrowers is administrative wage garnishment. This is a separate process from Treasury Offset, and allows the government to order private employers to withhold up to 15% of a defaulted borrower’s earnings and apply it involuntarily to their student debt. Importantly, the department can pursue administrative wage garnishment in addition to Treasury Offset – they are not mutually exclusive programs (except for federal employees). That means if you are in default on your loans, the government could take 15% of your pay, and also seize your entire tax refund, for instance.
As with Treasury Offset, the government is required to send out initial notifications to borrowers, typically titled a “Notice Prior To Wage Withholding.” This notice will outline a borrower’s options to avoid wage garnishment. These can include notifying the department that the borrower has only recently become employed following a period of unemployment; disputing the student loan debt; requesting an administrative hearing based on hardship; filing for bankruptcy; applying for federal default resolution programs like loan rehabilitation or Direct loan consolidation; or applying for an administrative discharge if applicable. Borrowers have only a limited time to act, typically 30 days, before the garnishment will begin.
Importantly, borrowers may still have options to end wage garnishment and get out of default after wage garnishment has begun, but it can be much more difficult at that stage of the process. For example, to pursue loan rehabilitation, borrowers may have to make monthly rehabilitation payments in addition to their garnishment payments for a period of at least five months before the garnishment can be suspended. Direct loan consolidation may not be an option at all while a borrower is in active wage garnishment. And many borrowers pursuing administrative discharge or a hardship exemption will continue to be garnished until and unless they ultimately receive a favorable determination.
The department has indicated that administrative wage garnishment could begin as soon as the end of this month.
Borrowers In The SAVE Plan May Have Much Higher Payments And Delayed Student Loan Forgiveness
Meanwhile, more than eight million non-defaulted federal student loan borrowers who had enrolled in the SAVE plan may be hit with massively higher monthly payments later this year. That’s because House Republicans just passed legislation that would repeal the SAVE plan and force these borrowers into a modified version of IBR that might be far more expensive. Here are some examples of how this may significantly increase monthly student loan payments based on income:
- A single borrower with an annual income of around $40,000 would have had payments under the SAVE plan of $40 per month. Under IBR, their payments would jump to over $200 per month.
- A single borrower with an annual income of around $65,000 would have had payments under the SAVE plan of $250 per month. Under IBR, their payments would jump to $520 per month.
- A married borrower with two children with a household income of $100,000 would have had payments under the SAVE plan of around $230 per month. Under IBR, their payments would jump to nearly $650 per month.
Under the GOP bill, borrowers would have the option of forgoing IBR and instead enrolling in a new income-driven repayment plan called the Repayment Assistance Plan, or RAP. RAP may be more affordable in some cases, but it might be more expensive for other borrowers, and the plan would keep borrowers in repayment for up to 30 years before they could qualify for student loan forgiveness – far longer than any other current IDR plan:
- A single mother with two children and an annual income of around $45,000 would have had payments of $0 per month under the SAVE plan, and around $65 per month under the IBR plan. Under RAP, however, their payments would be around $50 per month. This is much more than SAVE, and slightly less than IBR, but she would have to be in repayment for far longer under the RAP plan to receive any student loan forgiveness.
- A married undergraduate borrower with two children with a household income of $100,000 would have had payments under the SAVE plan of $230 per month, and payments under the IBR plan of $650 per month. Under the RAP plan, her payments would be $550 per month. Again, this is much higher than under the SAVE plan, and slightly less than under IBR. However, this borrower could have been eligible for student loan forgiveness in as little as 20 years under SAVE and a newer version of IBR. The RAP plan, on the other hand, would force them to be in repayment for up to 30 years before qualifying for any student loan forgiveness. This would effectively cost this borrower up to an additional $38,000 in total payments over time.
The House-passed legislation has not become law yet, as it must now be considered by the Senate, which may make changes to the bill’s provisions. But it appears increasingly likely that the SAVE plan will not survive. As a result, millions of student loan borrowers will have to contend with much higher payments in as soon as six months, as well as delayed student loan forgiveness, under any of the alternatives.
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