The U.S. Department of Education under President Donald Trump has started notifying millions of Americans with defaulted federal student loans that their wages may soon be garnished. This move comes after a long pause in collections due to the COVID-19 pandemic and could create serious financial difficulties for many.
Wage Deductions Starting in June
On Monday, the department began sending 30-day warning letters to about 195,000 borrowers, informing them that they will be included in the Treasury Offset Program. Under this program, the government can take money from:
- Tax refunds
- Wages
- Social Security benefits
- Disability payments
These funds are then used to repay the borrowers’ past-due federal debts.
Full Collection Plan by Late Summer
The Department of Education has now shared its first official timeline, stating that by late summer, all 5.3 million defaulted borrowers will get a notice from the U.S. Treasury that their income may be garnished.
The plan will be rolled out in waves, starting in early June, with borrowers seeing deductions directly from their paychecks if no action is taken.
Why This Is a Big Concern
Since the pandemic, the federal government had paused all collections on defaulted student loans. Now, with garnishments restarting, many borrowers are expected to face severe financial stress.
A new report from credit bureau TransUnion shows that over 20% of borrowers are already 90 days or more behind on their payments, compared to just 11.5% in early 2020. The report also says this is the highest rate of student loan delinquency ever recorded.
What Happens When Debt Goes to Collections?
Once a loan goes into collections:
- Borrowers may have less money for everyday expenses
- Their credit score may drop significantly
- Older Americans receiving Social Security may face serious health and financial problems if their benefits are cut
The Consumer Financial Protection Bureau has warned that garnishing Social Security payments can be especially harmful.
Lawmakers Push Back
Senator Kirsten Gillibrand (D-N.Y.) wrote to Education Secretary Linda MacMahon this week, asking the department to slow down the process and protect vulnerable borrowers.
Gillibrand wrote:
“Withholding income from borrowers will unnecessarily worsen local economies. The timing for these changes could not be worse.”
What Can Borrowers Do?
Borrowers in default have a few options to stop garnishment:
1. Loan Rehabilitation
This allows borrowers to make nine affordable monthly payments within 10 months. If they make the first five payments, wage garnishment may stop. However, the process can take several months depending on the loan type and servicer.
2. Loan Consolidation
This is a faster option where loans are combined into one new loan. But borrowers cannot consolidate unless the garnishment has already been lifted. It may also result in higher interest costs.
3. Repayment or Income-Driven Plans
Borrowers can start paying back loans or enroll in income-driven repayment plans to avoid default. These plans reduce monthly payments based on income.
According to Ellen Keast, spokesperson for the Department of Education:
“A borrower with loans in default can stop Treasury Offset and wage garnishment by entering a rehabilitation agreement and making the first five of the nine required payments.”