Defaulted Student Loan Collections to Resume in May

The U.S. Department of Education announced on Monday that its Office of Federal Student Aid will resume collections of its defaulted federal student loan portfolio on Monday, May 5.

As more student loan borrowers will experience increased financial strain due to the resumption of collections on defaulted loans, it may be a signal for plan sponsors to bolster their student loan benefits and consider features like the student loan 401(k) matching provision created by the SECURE 2.0 Act of 2022.

According to the DOE, more than 5 million borrowers have not made a monthly payment in more than 360 days and are in default, while 4 million borrowers are in late-stage delinquency. As a result, according to the DOE, there could be almost 10 million borrowers in default in a few months. If this happens, almost 25% of the federal student loan portfolio would be in default.

The DOE has not collected on defaulted loans since March 2020, and more than 9.7 million borrowers have become past due on their payment since the COVID-19 payment pause ended in 2023, according to the Federal Reserve Bank of New York. Federal loan borrowers currently owe more than $1.6 trillion in student debt.

In addition, starting this year, borrowers who have not started making payments or repayment arrangements on their federal loans are being reported to credit reporting agencies as delinquent.

White House Press Secretary Karoline Leavitt told reporters on Tuesday, “The government can and will collect federal student loan debt by withholding money from borrowers’ federal pensions and even their wages.”

Resuming collections “protects taxpayers from shouldering the cost of federal student loans that borrowers willingly undertook to finance their postsecondary education,” the DOE stated in its announcement.

All borrowers in default will receive email notifications from the Office of Federal Student Aid over the next two weeks, making them aware of these developments and urging them to contact the Default Resolution Group to make a monthly payment, enroll in an income-driven repayment plan or sign up for loan rehabilitation.

Later this summer, FSA will send required notices of the beginning of administrative wage garnishment for anyone who has not made other arrangements. Wage garnishment is when the government orders a borrower’s employer to withhold up to 15% of their after-tax income to repay the government for the loan. Garnishment can be imposed without a court order.

Rich Williams, former deputy assistant secretary of policy, planning and innovation at the Department of Education, and now the chief customer officer of Summer, a student loan and education assistance platform, says plan sponsors have a critical opportunity to support employees without forcing them to choose between student debt and retirement savings.

“Under SECURE 2.0, matching retirement contributions based on student loan payments allows employers to turn a major financial stressor into a long-term savings advantage,” Williams says. “It’s essential to update plan documents in line with federal guidance and clearly communicate how employees can access these benefits—particularly the need to enroll in income-driven repayment plans and the risks of inaction, like wage garnishment or credit score damage.”

Williams adds that plan sponsors can remind participants that retirement contributions generally can’t be touched by collectors, and that they’re building long-term stability even as they deal with student debt.

“Employers should also be proactive in helping participants navigate this complex environment,” Williams says. “That means not just explaining the benefits, but offering access to advisers who can help employees balance repayment with retirement contributions. The right communication—timely, clear, and solution-focused—can turn student loan anxiety into engagement with employer-sponsored financial tools.”

The DOE also announced it will authorize guaranty agencies that they may begin involuntary collection activities on loans under the Federal Family Education Loan Program. All FSA collection activities are required under the Higher Education Act and conducted only after student and parent borrowers have been provided sufficient notice and opportunity to repay their loans under the law.

FSA plans to conduct a “robust communications campaign” to remind borrowers about their obligations through emails and social media posts.

In addition, FSA will launch an “enhanced” income-driven repayment process, aiming to simplify the time that it will take borrowers to enroll in income-driven plans and eliminating the need for borrowers to recertify their income every year.

More information will be posted on StudentAid.gov next week.