A new memo from the U.S. Department of Education reveals the Biden administration's strategy to prevent a surge in student loan defaults. The memo details steps taken to shield borrowers during the pandemic and lays out plans for resuming collection activities while mitigating the impact on borrowers.
In a new U.S. Department of Education memo obtained by CNBC, a top official details the steps the Biden administration has taken to prevent a default crisis among federal student loan borrowers. There were roughly 7.5 million federal student loan borrowers in default in 2022, according to the Education Department.
This year, for the first time in about five years, borrowers who have defaulted on their federal student loan debt will face collection activities, including wage garnishment and Social Security benefit offsets. The memo, dated just days before the Trump administration takes over, outlines strategies the Department will use to help student loan borrowers stay current as collection efforts resume this year. 'It is critical to continue the initiatives and fully implement the actions outlined in this memo, as the Department plans to resume default penalties and mandatory collections later this year,' writes U.S. Under Secretary of Education James Kvaal in the memo. After the Covid-era pause on federal student loan payments expired in September 2023, the Biden administration offered borrowers a 12-month grace period. During that time, they were shielded from most of the consequences of falling behind on their payments. The relief period ended on Now, federal student loan borrowers in default may see their wages garnished starting in October of this year, according to the Education Department. Meanwhile, Social Security benefit offsets could resume as early as August. The U.S. Department of Education memo directs its Federal Student Aid office to continue the Biden administration's work to avoid defaults. This includes making it easier for borrowers to enroll in affordable repayment plans, such as allowing borrowers to authorize the department to obtain their income information from the IRS and to automatically enroll borrowers in an income-driven repayment plan if they become 75 days delinquent on their loans. (IDR plans base a borrower's monthly bill on their discretionary income and family size, and some are left with a $0 monthly bill. Any remaining debt is canceled after a certain period, typically 20 or 25 years.) Borrowers should also be 'screened for other forgiveness opportunities before they formally default,' the memo says. The memo also encourages the Education Department to explore options for increasing the current interest rate incentive to get borrowers to sign up for automatic payments to their student loan servicer. As of now, borrowers can typically get an 0.25 percentage point reduction in their interest rate by doing so. The memo emphasizes the importance of 'ensuring borrowers have a clear understanding of their repayment options, including income-driven repayment plans, and a pathway to forgiveness.' Currently, federal student loan borrowers need to exit default before they can access any of the income-driven repayment plans, including IBR. According to the memo, the Biden administration has eliminated most collection fees on federal student loans. In early 2024, it also took steps to protect a higher amount of people's Social Security benefits from the department's collection powers. When the consequences of defaults resume, those with a monthly Social Security benefit under $1,883 can protect those benefits from offset, compared with the current protected amount of $750 in place today. 'Available data suggest that these actions will effectively halt Social Security offsets for more than half of affected borrowers and reduce the offset amount for many others,' the memo says.
STUDENT LOANS DEFAULT BIDEN ADMINISTRATION COLLECTION ACTIVITIES INCOME-DRIVEN REPAYMENT PLANS SOCIAL SECURITY OFFSETS
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