Article Summary –
After a five-year pause due to the pandemic, the Trump administration has resumed financial penalties for borrowers in default on student loans, affecting at least 5 million people, with potential consequences like wage garnishment and withheld tax refunds. The Biden administration restarted loan repayments in October 2023 without immediate penalties, but interest has been accruing for many borrowers since fall 2023, leading to confusion and financial hardship. Proposed changes by congressional Republicans aim to alter student loan structures, including the elimination of subsidized loans, capping undergraduate borrowing, and modifying income-driven repayment plans, all of which could increase borrowing costs for students, especially those in graduate programs.
This story was produced by The Hechinger Report, a nonprofit, nonpartisan news outlet focused on education.
After a five-year pause initiated during the pandemic, financial penalties on overdue student loans are resuming, causing confusion. Millions of borrowers are already in default, and more are expected to join them.
Approximately 43 million borrowers owe $1.6 trillion in federal student loan debt. As of May 5, those in default risk having tax refunds withheld and wages garnished if they don’t resume payments.
The Hechinger Report consulted experts to provide guidance on the return of student loan collections and ongoing congressional efforts to reform repayment terms.
Loan repayments restarted in October 2023. However, interest continues to accumulate for some borrowers since fall 2023.
Higher Education and Financial Challenges
Pursuing a college degree often leads to student loan debt, with about half of bachelor’s degree graduates leaving school owing more than $29,000. Even public university graduates average $20,000 in debt. The Trump administration is anticipated to intensify collection efforts while Congress considers modifications to repayment plans.
What if I neglect to repay my loan?
Failure to make payments for 270 days results in default. The Department of Education will notify 195,000 borrowers of possible tax refund and wage garnishments. Borrowers can appeal wage garnishments, but default damages credit scores, affecting rental and borrowing opportunities.
Can I delay repayment by returning to school?
Enrolling in school can defer loans, but it may increase total debt. Without assurance that further education will enhance income, this strategy could complicate repayment.
What if I can’t afford my loan payments?
Consider income-based repayment plans, which adjust payments based on earnings. Options like the graduated repayment plan and extended repayment plan offer alternatives. The Loan Simulator can help identify viable options.
Where can I seek assistance?
The Default Resolution Group and Federal Student Aid call center provide support. Borrowers can also contact loan servicers for guidance.
Understanding Loan Deferment, Forbearance, and Default
- Loan deferment: Temporarily halt payments without penalties under specific circumstances like economic hardship, with subsidized loans not accruing interest.
- Forbearance: Allows reduced or paused payments, though interest generally continues to accrue.
- Default: Occurs after 270 days of missed payments, resulting in potential wage garnishments and a lowered credit score.
Are income-driven repayment plans facing challenges?
The Biden administration’s SAVE plan, offering reduced payments and faster loan forgiveness, is paused due to legal challenges. Borrowers can still opt for other plans like PAYE, which caps payments at 10% of income, or the Income-Contingent Repayment Plan. Republicans propose a single income-based repayment option, pending Senate approval.
Current Status of the SAVE Program Court Cases
The SAVE plan is on hold, affecting 8 million enrolled borrowers by pausing payments and interest. Those pursuing loan forgiveness in public service aren’t advancing toward that goal, needing alternative plans if the program ends.
Public Service Loan Forgiveness (PSLF) Status
PSLF is available for borrowers in eligible jobs who make regular payments for 10 years. The Trump administration’s executive order could limit qualifying organizations, but its impact remains uncertain.
Potential Student Loan Changes
Congressional Republicans propose removing subsidized loans, capping undergraduate borrowing, and ending the Grad Plus program, potentially increasing reliance on private loans. Proposed changes are part of the federal budget bill and may evolve during legislative negotiations.
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