Student loans in default will be sent for collection. Here's what to know for borrowers

Default loans to collections

Photo:AP Photo/Jose Luis Magana, File

FILE - The U.S. Department of Education building is seen in Washington, Dec. 3, 2024.

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

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

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.

The department says it will soon begin sending notices on collection efforts, but there are options for borrowers to get out of default.

Here are some key things to know.

How will involuntary collection 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.

What is the difference between delinquent and default in my student loans?

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.

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.