Urgent Steps to Prevent Defaulted Student Loans from Collections by May 5 Deadline

The US Department of Education has announced that student loan payments and collections will resume on May 5, ending a five-year pause. This means borrowers with defaulted loans face imminent consequences such as wage garnishment, tax refund seizures, and Social Security benefit withholding starting this summer. More than 5 million borrowers have defaulted, defined as being 270 days past due, and are at risk of severe financial penalties.

Borrowers will receive notifications from the Office of Federal Student Aid if their loans are in default. It is crucial to verify loan status by logging into studentaid.gov and to act quickly if loans are in default. Ignoring the situation can lead to credit score damage, wage garnishment of up to 15% of disposable income, and loss of eligibility for income-driven repayment plans or additional federal aid.

To resolve defaulted loans before the May 5 deadline, borrowers have several options:

• Consolidation: Combining defaulted loans into a direct consolidation loan can stop collections and allow enrollment in income-driven repayment plans, though the default remains on credit reports and interest may increase.
• Rehabilitation: Making nine consecutive on-time payments based on income removes the default status and some negative credit impacts, potentially stopping wage garnishment during the process.
• Paying off the balance: Paying the full loan amount within 65 days of default notification can avoid collections and credit damage, though this may be challenging for many borrowers.

For borrowers not yet in default but behind on payments, options such as income-driven repayment plans, deferment, and forbearance remain available. Making even one full payment before default can prevent loans from entering collections and preserve eligibility for these programs.

Borrowers enrolled in the Saving for a Valuable Education (SAVE) repayment plan currently have paused payments due to a court order, but payments are expected to resume soon. Those borrowers should consider applying for alternative income-driven repayment plans to prepare for the restart.

The approaching May 5 deadline underscores the importance of proactive borrower engagement and effective loan servicing strategies. Financial institutions and government agencies must leverage data-driven approaches to identify at-risk borrowers and facilitate timely interventions that mitigate financial harm and improve repayment outcomes.