What to Know About Federal Student Loan Collections

What the Education Department's Announcement Means

The federal government has not collected on defaulted student loans since March 2020. The Education Department's decision to resume collection efforts comes as nearly 25% of federal student loans are at risk of being in default in the next few months.

If you're current on your federal student loans, you don't have to worry about the announcement. However, if you're currently in default, you should receive an email from the Office of Federal Student Aid (FSA) explaining the development and detailing your options for resolving your default status.

Here's what to expect.

Treasury Offset Program

On May 5, FSA will restart the Treasury offset program. Once you receive the notice of intent, you'll have 65 days to resolve your default status.

Otherwise, the agency will start reporting it to the national credit reporting agencies and begin withholding money from federal tax refunds, Social Security payments and other federal benefits and applying it to your debt. Additionally, state tax refunds may be withheld.

The offsets will continue until you've paid off your debt or resolved your default status.

Here's what you can do:

• Establish an approved repayment plan. Enter into a repayment agreement with your loan servicer, enter a loan rehabilitation agreement or consolidate your defaulted loans.
• Pay the debt in full. You can do this by contacting the Education Department's Default Resolution Group, which manages defaulted loans.
• Make a valid objection. Consider this option if you dispute the debt or your default status, you're currently in bankruptcy or you're totally and permanently disabled.

Wage Garnishment

Later this summer, FSA will start sending notices about wage garnishment. If you receive one, you'll have 30 days to negotiate a voluntary repayment plan with your loan servicer or request a hearing to object to the garnishment.

If you don't meet this deadline, the federal agency will instruct your employer to withhold up to 15% of your disposable pay, which is your net pay after deductions.

The garnishments will continue until you've paid off your debt or resolved your default status.

Here's how you can avoid wage garnishment:

• Negotiate a repayment agreement. Reach out to your loan servicer to renegotiate your repayment terms and start making payments.
• Request a hearing. Consider this option if you dispute the debt, you believe that garnishment would create extreme financial hardship or you've been employed for less than 12 months following an involuntary separation from another employer. Keep in mind, though, that hearings must be done in person at one of three regional offices in Atlanta, Chicago or San Francisco.

Credit Reporting

The Education Department hasn't reported defaulted student loans since March 2020, but that will resume along with the Treasury offset program.

In other words, if you receive a Treasury offset notice, you'll have 65 days until the federal agency reports your past-due debt to the credit bureaus.

Just one late payment can cause significant damage to your credit score, so it's no surprise that a defaulted loan in collections can be devastating. A lower credit score can limit your access to affordable credit, cause your homeowners and auto insurance rates to increase, and potentially even impact your options for employment and renting an apartment or home.

Here's what you can do:

• Resolve your default status. Ways to get out of default include loan rehabilitation and consolidation. Note, however, that if the default is already listed on your credit reports, only rehabilitation will remove that derogatory mark—though late payments will remain.
• Rebuild your credit history. If you don't resolve your default status in time, it's important to take steps to rebuild your credit. Actions you can take include paying bills on time, maintaining a low credit utilization rate by paying down revolving debt such as credit cards, becoming an authorized user on a loved ones credit card account, and considering a secured credit card or credit-builder loan.

Learn more: How to Improve Your Credit Score

How to Know if You're Affected

According to the Education Department, you're considered in default if you don't make a scheduled payment for at least 270 days.

If you were already in default before the student loan pause began in March 2020, you should receive an email explaining the developments. You'll also receive the Treasury offset notice via mail at your last known address. This notice may only be sent once, so it's important to make sure your contact information is up to date with your student loan servicer.

If you were current on payments before the pandemic protections were created but haven't paid since monthly payments resumed in October, you could be coming up on default in the next few months.

Regardless of your situation, take steps to adjust your budget so you can get on track with payments. You can also reach out to your loan servicer to ask about income-driven repayment plans, deferment or forbearance.

You can also reach out to student loan advocates and ombudsmen in your state to learn more about your options.

The Bottom Line

If you're in default on your federal student loans, it's critical to act quickly to avoid serious consequences like wage garnishment, tax refund offsets and credit damage. Review your options, contact your loan servicer and take steps now to resolve your default status.

As you work to address your student loans, it's important to monitor your credit and keep track of the actions that help or hurt your credit score. With Experian's free credit monitoring service, you'll get access to your FICO^® Score^☉ and Experian credit report, along with real-time alerts when changes are made to your report.