Student loan debt collection restarts: How to avoid garnished wages, tax refund seizures

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For five years, student loan borrowers who consistently couldn't pay their bills did not face the threat of debt collection. But all that extra breathing room is now gone.

About 195,000 borrowers who haven't paid their student loan bills for at least nine months received a 30-day official notice the week of May 5 from the U.S. Department of Treasury notifying them that their federal benefits checks will be cut in early June.

Later this summer, the Education Department said, all 5.3 million defaulted borrowers will receive a 30-day notice their wages will be garnished to cover their long unpaid student debt. Loan collection has been on pause since the early days of the COVID-19 pandemic in 2020.

Borrowers in default are being urged to contact the Education Department's default resolution group to make a monthly payment, enroll in an income-driven repayment plan, or sign up for loan rehabilitation.

"This may be one of the largest groups of people to simultaneously go into default at the same time," said Kathryn Ellywicz, a former financial counselor at GreenPath Financial Wellness, a national, nonprofit counseling and debt management group based in Farmington Hills, Michigan.

Dealing with debt collection will be a massive headache for many, as paychecks will be dinged, tax refunds will be confiscated, and even Social Security benefits are at risk of being taken to cover that unpaid college debt. But some steps can be taken to better manage the pain.

The good news is that many borrowers still can take action to avoid debt collection by opting for a pathway out of default.

The challenge, and advocates say it's a serious one, is that many borrowers will find it much tougher to reach someone at the Education Department after the Trump administration cut the staff nearly in half.

"What we're hearing from borrowers is that they're having a very hard time actually taking advantage of those rights. Their calls are getting dropped. They're getting bounced around. They're waiting on hold for hours," said Mike Pierce, executive director of the Student Borrower Protection Center, an advocacy group based in Washington, D.C.

Borrowers will need to do more work, possibly making repeated calls, to get on track. Pierce said many will need to contact their congressional representative to get the ball rolling if they run into consistent problems. Members of Congress have caseworkers who help constituents experiencing issues with a federal agency. His group offers tips online for how to ask for help at ProtectBorrowers.org/caseworktool.

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What's concerning is that many people who are in default only took some classes in college and don't have college degrees or good paying jobs now, Pierce said. They will need some way to resolve the issue so that their wages or tax refunds aren't taken as part of debt collection.

Many borrowers with lower student loan balances would have seen their student loans forgiven under former President Joe Biden's debt forgiveness plan. In 2023, the Supreme Court blocked that effort, which called for forgiving up to $10,000 ‒ or in some cases, up to $20,000 ‒ of federal student loan debt for individual borrowers.

What it takes for student loans to fall into default

We're typically talking about 270 days of nonpayment for many federal student loan servicers to consider a loan to be in default. Essentially, you'd need to have not made a payment for roughly nine months. Check the terms of your specific student loans.

Federal student loans enter default after 270 days of missed payments, but transfer to the Department of Education’s default collections program after 360 days.

The StudentAid.gov site notes: "If you’re over 360 days delinquent, your loans may be in default." The site gives you a spot to log in to see whether your loans are in default.

Mark Kantrowitz, a student loan expert and author, noted that 7 million borrowers were in default on their federal student loans before the pandemic. But about 2 million of those borrowers signed up for the one-time "Fresh Start" initiative offered by the Education Department to return their loans to a current status. Borrowers had to sign up for that program by the end of September 2024.

Signing up for "Fresh Start" enabled borrowers in default to return to good standing, improve their credit and then become eligible to sign up for a more affordable income-driven repayment plan.

The number of borrowers in default is expected to grow because borrowers only had to resume paying their student loans back in October 2023. And borrowers who didn't pay had an extra year of grace.

A temporary "on-ramp" to repayment took place from October 2023 through Sept. 30, 2024, to protect financially vulnerable borrowers who missed making federal student loan payments. No action was taken during that time that resulted in declaring a loan in default.

During that 12-month window, the Education Department did not report delinquent payments to the credit bureaus. But it was not a free ride: Interest continued to accrue.

"Since it takes 270 days of nonpayment for a loan to go into default, the soonest someone new could go into default is June 27, 2025," Kantrowitz noted.

A U.S. Department of Education release gives an alarming estimate for how many borrowers could be in default ahead, indicating that "4 million borrowers are in late-stage delinquency (91-180 days). As a result, there could be almost 10 million borrowers in default in a few months."

But Kantrowitz, who has tracked student loan debt for decades, said the estimates "about borrowers on the cusp of default are an exaggeration."

He said historical data demonstrates that most of these 4 million borrowers will not proceed to default, and seek other options to avoid default.

How to check student loan status

Ellywicz, the former GreenPath Financial Wellness financial counselor, told me that borrowers who haven't paid their student loan bills in the past five years need to take a deep breath now and prepare to take some action.

"It can be overwhelming to integrate a payment back into your budget, especially when it’s been years since you’ve paid," Ellywicz said.

She recommends going to StudentAid.gov to figure out how much you owe, who your loan servicer is, and how to apply for income-based repayment plans that can lower your monthly payments to make them more affordable.

"Unfortunately, interest charges did begin again in October 2023, so you may owe more than you remember," she said.

It is important to note, she said, that income-based repayment plans for student loans are available again. The application was briefly removed from the StudentAid.gov website, but it is back now.

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"If you are contacted by a company asking you to pay "enrollment," "subscription," or "maintenance" fees to help you get out of default," the Education Department states, "you should walk away. Your loan holder will help you with your defaulted loan for free."

What happens if you're in default

Once a federal student loan is in default, Ellywicz said, servicers can start the process of wage garnishment. The Education Department is not going to need to take any legal action before taking a portion of your paycheck directly.

The Education Department will send a certified letter to your last known address before reaching out to your employer to garnish your wages. You'd have 30 days' notice.

Later this summer, according to the Education Department, the Office of Federal Student Aid will send the required notices beginning administrative wage garnishment. It's essential to read that notice carefully.

Borrowers who know that they've not made payments on student debt for many months should start talking to their loan servicers, credit counseling agencies and others. Address the problem head-on.

"We understand it may feel shameful to be facing default or wage garnishment, but communicating now will likely help you find a solution that you didn’t know existed," Ellywicz said.

GreenPath Financial Wellness, a nonprofit group, offers counseling for those who face trouble paying their student debt, as well as other financial headaches.

The two main ways to get out of default are rehabilitating your loans or consolidating your loans.

"A final option to avoid wage garnishment is to pay the debt in full, which is likely not realistic for most people," Ellywicz said.

Kantrowitz noted that borrowers can rehabilitate defaulted loans through making nine out of 10 consecutive, on-time, full, voluntary, reasonable and affordable payments or through loan consolidation as part of a loan rehabilitation agreement.

The Education Department notes that, depending on a borrower's income, payments under a loan rehabilitation agreement could be as low as $5 a month.

Consolidation is quicker, Kantrowitz said, but it does not remove the default from the borrower's credit history, and interest and collection costs may be added to the outstanding loan balance.

Borrowers who rehabilitate their federal student loans through consolidation may also be restricted to an income-driven repayment plan, which Kantrowitz said isn't necessarily a bad option.

The Education Department said it will offer support to assist borrowers in selecting the best repayment plan, including a new Loan Simulator, AI Assistant called Aidan, and extended servicers call times.

An enhanced Income-Driven Repayment process will simplify the time that it takes borrowers to enroll, according to the Education Department, and eliminate the need for borrowers to recertify their income every year.

Your college is supposed to reach out about your loans

Secretary of Education Linda McMahon is urging all colleges and universities that receive federal funding assistance to reach out to all former students by June 30 to remind them of their obligation to repay any federal student loan that is not in deferment or forbearance.

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McMahon took time to blame many schools for saddling "students with enormous debt loads without paying enough attention to whether their own graduates are truly prepared to succeed in the labor market."

How much of a paycheck can be garnished to cover student loan debt

Through administrative wage garnishment, Kantrowitz said, the Education Department can require employers to send it up to 15% of a borrower's disposable pay to repay the defaulted loans. Disposable income is calculated after taxes and other legal obligations.

The borrower, he noted, must be left with at least 30 times the federal minimum wage, now $7.25 per hour, after the garnishment. Doing the math, we're talking about $217.50 a week.

Borrowers can request a hearing to challenge the wage garnishment and offset based on financial hardship.

Kantrowitz said the most common challenge involves having involuntarily lost your job less than 12 months ago.

Other challenges, he said, include proving that the debt was paid in full, proving that the debt was discharged in bankruptcy, and demonstrating that a bankruptcy proceeding is currently pending, which blocks collection activity until the bankruptcy proceedings are over.

Another challenge to wage garnishment involves demonstrating that you are totally and permanently disabled.

Student loan debt can take your tax refund

If your federal student loans are in default, it is possible to see all of your federal income tax refund used as an offset to repay defaulted federal student loans.

If you've already received your tax refund for your 2024 federal income tax return, you're not going to lose that money. But people who obtained an automatic extension and delayed filing face a greater risk of losing their 2024 tax refund if their student loans are in default.

Though, Kantrowitz said, some borrowers may subsequently adjust their withholdings to reduce the amount of their 2025 federal income tax refund that may be offset.

Same if you are receiving Social Security benefits

The Education Department can use the offset of Social Security benefits to collect the outstanding balance when borrowers default on their federal student loans, too.

Among the borrowers who are likely to experience forced collections are an estimated 452,000 borrowers ages 62 and older with defaulted loans who are likely receiving Social Security benefits, according to a report by the Consumer Financial Protection Bureau.

Currently, $750 per month of Social Security income is protected from that offset.

"It is unfortunate because the recipient of Social Security may need that money to pay for living expenses, such as food, housing and medicine," Kantrowitz said.

"If Social Security is their sole source of income, they may be living under the poverty line as the result of the Treasury Offset," he said.

Going into default will hurt

You're looking at a significant drop in your credit score if your student loans are in default.

You also lose eligibility to receive federal student aid while your loans are in default. You're unable to change repayment plans and request deferment and forbearance, and you're up against the forced collections of tax refunds.

Options to avoid student loan default

If you have trouble paying our student loans but have not yet defaulted, review your options now.

Are you dealing with a short-term financial difficulty? Maybe a medical or maternity, or paternity leave? Or temporary unemployment? If so, Kantrowitz suggests considering the economic hardship deferment, unemployment deferment, cancer deferment, or a general forbearance to suspend the repayment obligation while you fix your financial situation.

This is not a good idea if there's no end in sight for your financial difficulties.

"Interest may continue to accrue during a deferment or forbearance, increasing the amount of debt, so deferments and forbearances are not a long-term solution," Kantrowitz said.

Are you dealing with a long-term financial problem? If so, Kantrowitz said, you should consider switching into a different repayment plan, such as extended or income-driven repayment. You have more options before you go into default.

Repayment plans reduce the monthly payment by increasing the repayment term to 20 years or 25 years ‒ up from the 10 years for repayment under a standard term. You'd likely see a more affordable monthly payment, which makes it easier to avoid default.

The downside is that this strategy increases the total cost of the loan.

"Income-driven repayment bases the monthly payment on a percentage of discretionary income, as opposed to the amount you owe," Kantrowitz said. Discretionary income is income minus a multiple of the poverty line.

In addition, he said, borrowers should sign up for autopay, where the monthly loan payment is automatically transferred from their bank account to the loan servicer.

"Not only will they be less likely to be late with a payment, but most lenders provide a small interest rate reduction, typically 0.25%, as an incentive," he said.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.