Student Loans in Default? What to Know Before Collections Restart Monday

Starting next week, the Education Department said student loans that are in default will be referred for collections.

Roughly 5.3 million borrowers nationwide are in default on their federal student loans and soon could be subject to having their wages garnished starting May 5.

Referrals for collection had been put on hold since March 2020 because of the COVID-19 pandemic, when the U.S. government also paused federal student loan payments and interest accrual as a temporary relief measure. That grace period was extended multiple times by the Biden administration and ended in October.

• Jump straight to: What to know if you’re a student loan borrower in default
  

Amanda Kahn Fried, chief of policy and communications at the San Francisco Office of the Treasurer, said city officials are “deeply concerned” about the Trump administration’s decision to resume collection on defaulted student loans on Monday.

According to the most recent available figures from March 2018, approximately 735,000 student loan borrowers in the nine-county Bay Area — over 12% of the region’s adult population — owed a collective $26.6 billion in student debt, with the average borrower owing a balance of over $36,000.

Fried said that the Treasury’s Office of Financial Empowerment, which works with residents around navigating their student debt, is especially worried that “people don’t necessarily know that this change is coming and going into effect.”

“Our concern is that starting May 5, borrowers who are already on the brink could see their wages garnished, their tax refunds seized and even their social security checks docked, which is the opposite of what we need to build a stronger economy here in San Francisco and across the country.”

While the Bay Area’s student loan burden is lower than the national level, San Francisco officials say there are “dramatic disparities” in who is most affected locally by this type of debt, with “considerably higher delinquency and default” in lower-income communities and communities of color.

Fried said she’s particularly concerned about the impact on residents who took out student loans but ultimately did not obtain a degree — people who “are particularly low income who may have taken a risk and tried to get a degree and not been able to complete that degree for a number of reasons, and that will find themselves in default and have a very, very hard time catching up,” because they “don’t actually have the earning power to be able to repay that debt.”

“When we gut borrower protections, we don’t just hurt individuals with debt,” Fried said. “We actually make it harder for cities like San Francisco to hire nurses and public servants and teachers that our communities depend on.”

The Education Department said it will soon begin sending notices on collection efforts, but there are options for borrowers to get out of default. Keep reading for what student loan borrowers need to know about this announcement.

How will ‘involuntary collection’ on student loan debt work?

Beginning May 5, the department will begin “involuntary collection” through the Treasury Department’s offset program. Borrowers who have student loans in default will receive communication from Federal Student Aid in the upcoming weeks with information about their options, according to the Education Department.

Involuntary collection means the government can garnish wages, intercept tax refunds and seize portions of Social Security checks and other benefit payments to go toward paying back the loan.

“In general, the collections will start with a letter,” Fried said. “So, making sure that your contact information is up to date is also very important so that you’re not missing any notices.”

While “the first step typically isn’t having your wages garnished,” Fried acknowledged that “it’s very hard to predict in this environment if that’s what is going to happen.”

If you’re a student loan borrower in default, this latest announcement is undoubtedly anxiety-provoking. But “the first piece of advice I would have is to obviously take a deep breath, and then to really approach this from a very organized fashion,” Fried recommended.

As a starting point, “take screenshots of your progress on your different loan websites: Go to the Federal Student Aid website, literally take a photo of everything you can find about your account today,” she said. “Download all of your payment history documents for your records, [and] just make sure you really capture a true picture of where you are.”

How do I know if my student loans are in default — or if I’m delinquent?

A student loan becomes delinquent when a borrower doesn’t make a payment 90 days after its due date. If you continue to be delinquent on your loan for 270 days — or roughly nine months — then your loan goes into default.

While being delinquent affects your credit score, going into default has more serious consequences, such as wage garnishment.

What happens when a loan goes into default?

When you fall behind on a loan by 270 days, the loan appears on your credit report as being in default.

Once a loan is in default, the government will send the borrower into collections.

What can I do right now if my student loan is in default?

The Education Department is recommending borrowers visit its Default Resolution Group to make a monthly payment, enroll in an income-driven repayment plan, or sign up for loan rehabilitation.

Betsy Mayotte, president of The Institute for Student Loan Advisors, recommends loan rehabilitation as an option.

Borrowers in default must ask their loan servicer to be placed into such a program. Typically, servicers ask for proof of income and expenses to calculate a payment amount. Once a borrower has paid on time for nine months in a row, they are taken out of default, Mayotte said. A loan rehabilitation can only be done once.

While Fried said the best plan of action “if you absolutely can’t afford to make the payments” is to contact your student loan servicer, she also noted that “you need to be very cautious” about the option you choose, because of the interest these paths forward could add to your total amount owed.

Fried also recommended that anyone who lives, works or receives services in San Francisco can book a free financial consultation with the city’s Office of Financial Empowerment to discuss their student loans.

“Student debt is a very complicated landscape and there are a lot of different types of loans,” she said. “And so it is really important to have somebody work with you on your particular issues.”

What does ‘forbearance’ mean?

Student loan forbearance is a temporary pause on your student loan payments granted to borrowers who are experiencing financial difficulties. To apply for forbearance, borrowers must contact their loan servicer.

Borrowers can be granted forbearance by their loan servicer for up to 12 months, but interest will continue to accrue during this period.

Forbearance is not an option for borrowers whose student loans are in default. However, they are an option if you are delinquent on your loan.

How can a borrower find the status of their student loans?

Borrowers need to know the status of their student loans in order to find out if they are in default, said Kate Wood, student loans expert at NerdWallet.

To find the status of a student loan and their loan servicer information, borrowers need to access their studentaid.gov account. Since the Education Department is going to send notices about involuntary collections through email, borrowers want to make sure all their personal information is updated, such as email and physical address, Wood recommended.

Can involuntary collections affect my Supplemental Security Income?

Yes, benefits from Social Security are considered income and can be affected by involuntary collections.

How does delinquency affect my credit score?

Borrowers who are delinquent on their student loans take a massive hit on their credit scores, Wood said. Those who are delinquent on their student loans might see a drop of 100 points or more to their credit score. A delinquency stays on your credit report for seven years.

Credit scores are used in many aspects of people’s financial lives, such as access to credit cards, buying a house or renting an apartment.

Can I apply to income-driven repayment plans?

Income-driven repayment plans applications are currently open. These plans base your monthly student loan payment amount on your income and family size.

The Biden administration’s SAVE program is no longer open for applications since it was challenged in court. However, those who got accepted into the SAVE program are currently in administrative forbearance, meaning they don’t have to make payments.

To review income-driven repayment plan options, you can check the loan simulator at studentaid.gov.

Where can I find information and guidance about my student loans?

During this unpredictable time, you may be wondering how you can stay on top of the latest news about your student loans.

Mayotte told KQED earlier this year that the best information comes straight from the source itself — studentaid.gov. However, Californians also have a student loan ombudsperson that they can reach out to for questions or be reminded of their rights. Questions can be sent to Celina.Damian@dfpi.ca.gov.

If you have an issue with your loan servicer, you can file a complaint with the state’s Department of Financial Protection and Innovation. You can also reach out to DPFI by email at ask.DFPI@dfpi.ca.gov and by phone at 866-275-2677.

Other places to get updates on student loans include:

• Student Loan Planner
• The Institute of Student Loan Advisors
• Saving for College
• Adam S. Minsky, a lawyer specializing in student loans

This story contains reporting from KQED’s Nisa Khan.