Federal Student Loan Collections Are Back. Here’s What To Do if You’re in Default

Federal student loan collections are set to resume on May 5, 2025, after a five-year pause that began during the pandemic. The Department of Education announced the change on April 21.

If you have federal student loans in default, that means you could soon face involuntary collections, including wage garnishment, tax refund seizures, and Social Security benefit offsets of as much as 15%.

Borrowers in default are being urged to contact their loan servicers or the Default Resolution Group now to explore their options for avoiding such actions.

Why are collections restarting?

In a press release announcing the change, Education Secretary Linda McMahon said the Department of Education is shifting its focus back to enforcing repayment, calling forgiveness efforts from the Biden administration “irresponsible,” and warning that taxpayers should no longer be responsible for the cost of unpaid student loans.

The return of collections on student loans could affect millions of borrowers who haven't made a student loan payment in more than a year, and many for much longer. Approximately 5 million federal borrowers are currently in default, and 4 million others are in late-stage delinquency, meaning they have at least one overdue payment, according to the Department of Education.

What to do if your federal loans are in default

If your federal loans are in default, the time to act is now. “We are trying to make it easily accessible for responsible folks to pay back their loans,” McMahon said. “We are keeping hours open longer at the service centers and having them open on the weekend to answer any questions.”

Collections are required by law but will only resume after you've been given notice and a chance to act. If you're in default, watch out for an email in the coming weeks with steps to avoid collections and get back on track. Your options may include:

Rehabilitate your loans

Loan rehabilitation lets you get out of default by making nine payments that are reasonable and affordable based on your income and expenses. The nine payments must be made during a period of 10 consecutive months. Each payment must be made within 20 days of the monthly due date.

Once you've completed the required payments, your loan is no longer in default. Wage garnishment and tax refund seizures will stop, and you'll regain access to federal student aid and benefits like deferment, forbearance, and access to loan forgiveness programs like PSLF and income-driven repayment (IDR) plans.

The record of default is also removed from your credit history (though the record of previous late payments remains).

Consolidate your loans

Federal loan consolidation converts your defaulted loan into a Direct Consolidation Loan. To qualify, you must either agree to repay the new loan under an income-driven repayment plan, or make three, voluntary, on-time payments on the defaulted loan before consolidating.

See Also: Student Loan Rehabilitation vs. Consolidation: A Complete Comparison

“Although consolidation is quicker, it does not remove the default from the borrower's credit history, and interest and collection costs may be added to the outstanding loan balance,” warns Mark Kantrowitz, financial aid expert and author of “How to Appeal for More College Financial Aid.”

Repay the defaulted loan

You can always choose to repay your defaulted loan in full. This is the fastest way to resolve a default, but it may not be realistic depending on your financial situation. If you're able to go this route, you may be able to have outstanding fees and collection costs waived.

Keep in mind that paying off your defaulted loan won't remove the default record from your credit report. The defaulted loan will continue to show up on your credit report as “repaid in full” for as long as seven years, which means future lenders can see that you fell behind on the loan.

What to do if you're at risk of default

If you're one of the 4 million borrowers who are behind on your student loan payments but haven't defaulted yet, you still have options to avoid collections.

The best approach depends on whether your financial situation is temporary or long-term.

• If your situation is temporary — like a job loss, medical leave, or other short-term setbacks — look into deferment or forbearance. “Consider the economic hardship deferment, unemployment deferment, cancer deferment, or a general forbearance,” advises Kantrowitz. Just know that interest may still accrue, so “deferments and forbearances are not a long-term solution,” he adds.
• If you're dealing with long-term financial difficulty, consider switching repayment plans. “If you have a job but it doesn't pay well enough to repay your student loans, and you have no prospects for increasing your income, consider switching into a different repayment plan, such as extended or income-driven repayment,” Kantrowitz advises. IDR plans base your monthly payments on your income, which can make payments more affordable.