With Americans reeling from high consumer prices, the federal government will suspend tax refund seizures and wage garnishments for people in default on their student loans, the Education Department said Friday.
The action dials back the Trump administration’s recent decision to resume involuntary collections after a nearly six-year suspension because of the pandemic.
The suspensions take effect immediately, with no defined end date. The move offers relief to the millions of Americans in default, but means the government is losing out on billions of dollars.
The Education Department said Friday that the temporary suspension will help the agency implement student loan repayment reforms to give borrowers more options to repay their loans and give defaulted borrowers more time to rehabilitate their loans. The tax bill that President Donald Trump signed into law last year calls for the creation of new repayment plans, while phasing out a few existing ones starting July 1.
“The Department determined that involuntary collection efforts such as Administrative Wage Garnishment and the Treasury Offset Program will function more efficiently and fairly after the Trump Administration implements significant improvements to our broken student loan system,” Under Secretary of Education Nicholas Kent said in a statement Friday.
About 5.3 million people have not made a payment on their federal student loans for nearly a year — defaults that place them at risk of having a portion of their paycheck, Social Security or disability income garnished or their tax refund withheld by the federal government. Many were in default before the federal government stopped collecting defaulted loans six years ago. Another 4.3 million borrowers are severely delinquent and nearing default, according to an analysis by the Congressional Research Service.
In December, the Education Department told The Washington Post that starting the week of Jan. 7, it would notify about 1,000 defaulted borrowers of plans to withhold a portion of their wages. After that, notices were supposed to be sent to a larger number of borrowers each month. The department would not confirm Friday whether those notices ever went out.
Under garnishment regulations, the Education Department can withhold up to 15 percent of a borrower’s disposable, or after-tax, income. The garnishment continues until the defaulted loans are paid off in full or the borrower takes action to get out of default.
“Borrowers were in an absolute panic about the government garnishing wages during an affordability crisis,” said Persis Yu, deputy executive director at the advocacy group Protect Borrowers. “Garnishing wages right at this moment was always a terrible idea.”
Protect Borrowers and the National Consumer Law Center have also been warning struggling borrowers to check if they are in student loan default before they file their taxes. The groups released a public service announcement Tuesday that encouraged people to call the Treasury Department to find out if they are on the list to lose some or all of their refund. Refunds of federal Child Tax Credits and Earned Income Tax Credits can be critical lifelines for impoverished families, the advocates said.
Defaults have historically been concentrated among borrowers with low loan balances who never completed their degree, leaving them less likely to find work that could pay off the debt.
While it was widely anticipated that the government would one day resume seizing the money, the collections would run counter to Trump’s promise to make life more affordable for Americans — a message he is heralding ahead of the midterm elections.
The White House’s decision to suspend involuntary collection undercuts the administration’s messaging around student loan repayment. The Education Department previously said the portfolio is headed toward a “fiscal cliff” if the Trump administration doesn’t restart involuntary collections.
When the Education Department announced the resumption of involuntary collection in April, Education Secretary Linda McMahon said her agency, with the help of the Treasury Department, would “shepherd the student loan program responsibly and according to the law, which means helping borrowers return to repayment — both for the sake of their own financial health and our nation’s economic outlook.”
But at an event in Rhode Island this week, McMahon signaled that the administration was changing plans. Asked if she had any concerns about making borrowers’ financial situation worse by garnishing their wages, the secretary said there was a pause on taking any action, even though no official announcement had been made.
Even with a suspension in place, interest will continue to accrue on defaulted loans and borrowers will still contend with the negative credit reporting. The Education Department is encouraging defaulted borrowers to explore resolutions, noting that it reports student loan defaults to credit reporting agencies.
Jacob Bogage contributed reporting.
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