Student Loan Collections to Restart, Starting Now
During his commencement address to the graduating class of UC Law School San Francisco earlier this month, California Supreme Court Associate Justice Goodwin Liu made a lighthearted reference to recent efforts of the current presidential administration to dismantle the Department of Education, joking that there is no one left at the Department to collect on the graduates’ student loan payments. Unfortunately for grads struggling with thousands of dollars in unpaid student loans, quite the opposite is true. Just a week before Justice Liu’s wry observation, the ED Department announced it would restart collections on defaulted student loans, a practice that had been halted for the last five years.
Read on to learn more about this latest move from the feds, what it means for borrowers struggling with debt or currently in default, and what kinds of legal help might be available. If you are overburdened with unpaid student loans, medical bills, credit cards, or other debt in Oxnard, Camarillo, or other Southern California communities, contact Rounds & Sutter, LLP, to meet with our Ventura County bankruptcy and debt relief lawyers.
“Pause” in Student Loan Collections Lifted
Last month, the U.S. Department of Education announced that its Office of Federal Student Aid (FSA) “will resume collections of its defaulted federal student loan portfolio on Monday, May 5th.” In its notice, the ED Department observed that it had not collected on defaulted loans since March 2020 and that the resumption of collections “protects taxpayers from shouldering the cost of federal student loans that borrowers willingly undertook to finance their postsecondary education.”
According to the Department’s press release, Congress passed a law requiring student and parent borrowers to start repaying their student loans in October 2023, but the Biden administration nevertheless kept the collection pause in place.
Borrowers are encouraged to either make monthly payments, enroll in an income-driven repayment plan, or sign up for loan rehabilitation. Meanwhile, loan agencies have been authorized to initiate involuntary collections activities.
Borrowers can expect to be contacted by USDE over the next couple of months and reminded of their financial obligations. FSA also intends to launch an “enhanced” income-driven repayment process with simplified procedures for borrowers to enroll in IDR plans and eliminate the requirement to recertify income annually.
Wage Garnishment – A Powerful Tool in the Hands of the Government
With the stepped-up enforcement that is sure to swiftly begin, borrowers in default may soon find themselves subject to wage garnishment. Wage garnishment is a legal process, usually a court order, that requires employers to withhold a portion of an employee’s wages and send that money to the creditor rather than the employee who earned the wages. When the creditor is a government payor like the Department of Education, a court order is often not even necessary.
A student loan is considered in default if a borrower doesn’t make payments for 270 days. Once a loan defaults, the government can order the borrower’s employer to withhold a portion of the borrower’s wages to repay the debt. The government can garnish up to 15% of a borrower’s disposable pay without a court order.
Before wage garnishment begins, the government will provide a notice to the borrower. Borrowers have the right to dispute the garnishment and may be able to avoid it if they can demonstrate financial hardship. This is a high barrier to meet, but it is not impossible. An experienced debt relief lawyer will know what type of evidence to collect and how to present it to make a compelling case against garnishment.
Defaulted borrowers may also face other collection actions, including the offset of tax refunds and Social Security benefits.
How a Student Loan Debt Relief Attorney Can Help
Bankruptcy is an option for eliminating student loans that for many is the best option available. Like credit card debt or medical bills, a student loan is an “unsecured debt” that is dischargeable in Chapter 7 or Chapter 13 bankruptcy. The rules for discharging student loan debt are more stringent, however, compared to other kinds of unsecured debt. To discharge a student loan, the borrower must show that being forced to repay the loan would be an undue hardship. Specifically, borrowers must show they would be unable to make payments and maintain a minimal standard of living, that their situation is unlikely to change for the foreseeable future, and that they have made a good faith effort to repay the loan. These criteria are known as the Brunner test after an influential court decision of the same name. While the Brunner test has been around for decades, how courts interpret terms like “minimal standard of living” has evolved over time, and while it was once thought extremely difficult if not impossible to discharge student loans in bankruptcy, that reality has changed in recent years for many student loan borrowers who found relief through bankruptcy.
Even without a student loan discharge, bankruptcy can help debtors afford to repay debts that don’t get discharged by discharging other debts, freeing up their disposable income and taking the edge off the unrelenting pressure and stress of overly burdensome debt.
Non-Bankruptcy Options
Outside of bankruptcy, some borrowers might look to debt settlement as a way to lower their interest rate, their monthly payments, or even the principal amount owed on the loan. Debt settlement does come with downsides, and negotiating an effective settlement can be difficult without skilled and knowledgeable legal representation.
The government, meanwhile, is pushing income-driven repayment (IDR) as a way to get borrowers out of default and into a plan that pays off their loans over time. Several government IDR programs exist, with different eligibility requirements and procedures. Depending on the specific type of IRD, borrowers can expect to put somewhere between 10 and 20% of their discretionary income toward loan servicing, with the remaining balance on the loan forgiven after making payments in the program for 20 or 25 years.
While enrolling in an IDR might keep a borrower out of collections, they could end up paying more interest over the life of their loan. Also, the amount forgiven at the end of the 20 to 25-year program counts as taxable income, in contrast to a loan amount discharged in bankruptcy, which is larger, immediate, and not taxed.
Contact Rounds & Sutter in Ventura for Effective Debt Relief
If you are struggling with student loans or other burdensome debt in Oxnard, Ventura, Camarillo, or surrounding areas, contact Rounds & Sutter, LLP, for a free consultation to explore your options and find out how we can help.