The federal student loan system is a mess right now.
There’s a lot going on with student debt in the midst of a U.S. Dept. of Education that’s being phased out and student loan administration reportedly being moved to the Small Business Administration, which has announced it’s about to cut its staff by 40%.
“Unprecedented uncertainty,” says Beth Akers, a higher education researcher at the conservative-leaning American Enterprise Institute (AEI).
“Total disarray,” says Michele Zampini with the left-leaning Institute for College Access and Success.
However, after scouring the internet for information, here are the most important things we found that we think you should know on one page.
Student Loan Collection Was Inevitable.
When the U.S. Dept. of Education paused federal student loan payments at the beginning of the COVID-19 pandemic, it paused the threat of default too. And the era of leniency that followed lasted so long — nearly the entire Biden Administration — that many borrowers are now being caught off-guard by the loan system’s slow return to business-as-usual.
On Oct. 1, 2024, the clock resumed and delinquency days started accumulating again. So, you can count from that date to determine how many days you might be behind.
Delinquency VS Default
When a borrower goes more than 90 days without a payment, a cascade of consequences kicks in, beginning with reporting that delinquency to the national credit bureaus. Weakened credit can make it harder to do all sorts of things, including buying a car or renting a place to live.
It gets worse. After 270 days without making a payment, a borrower is considered in default, which means wages and tax refunds can be seized by the U.S. government.
According to a National Public Radio report, as of March 7, 4.2 million borrowers were more than 90 days late on their payments. And nearly 5 million borrowers were between one and 90 days late.
Notifications
Scott Buchanan, who is the executive director of the Student Loan Servicing Alliance, which represents the companies that manage student loans for the federal government, says the law requires servicers to warn borrowers — repeatedly — before they plunge into default.
He has a simple message: Do not ignore these warnings.
If your phone rings and the Caller ID says it’s your loan servicer, Buchanan says, “We’re not trying to upsell you on anything. We have no product to offer. When you see us calling, it’s probably because there’s a problem. You need to answer.”
How Can You Tell If You’re Impacted?
The Dept. of Education says it will reach out to all borrowers in default before May 5, through emails and social media posts, “reminding them of their obligations and providing resources and support to assist them in selecting the best repayment plan.”
People can also check their status by logging into StudentAid.gov, the Dept. of Education’s website.
The online dashboard shows how much debt they owe and to whom, their monthly payment amount and — if they’re in default — a warning message that says so. It’s also where they can make sure their email and physical addresses are up-to-date.
What Are Your Options if You’re in Default?
There are three primary ways people can get out of default. The quickest, but hardest, is to repay the loans in full.
“If people could pay the loan in full, they probably wouldn’t be in default,” Mayotte says. “So that’s not really an option for most borrowers in this situation.”
The two other methods are loan consolidation and rehabilitation.
Loan consolidation is the faster of the two, says Mayotte. It involves paying off your defaulted loans with new repayment terms. While it does not remove the fact that you were once in default from your credit report, it does make you eligible for lower payment options.
For loan rehabilitation, a borrower must make multiple — typically nine — consecutive on-time payments of an amount that is usually based on their income. Once those are paid, the loan is taken out of default and the default line is removed from the person’s credit report.
Don’t Depend on the SAVE Plan to Save You
Former President Joe Biden’s Saving on a Valuable Education (SAVE) repayment plan was so generous with its payment terms and promise of forgiveness that federal courts are currently debating whether it’s legal. Before the courts put SAVE on hold, 8 million people had enrolled.
Now, these SAVE borrowers who are in legal limbo don’t have to make monthly payments. But if you’re a borrower hoping for someone to save SAVE, it might be wise to start exploring other options.
Even if the courts uphold the plan, Congress seems likely to override SAVE.
Consider Income-Driven Repayment Plans
The judge’s order freezing the SAVE plan has raised legal questions about the department’s other income-driven repayment plans: Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR).
The online form to enroll in these plans was removed from the Education Department’s website more than a month ago, but it’s reportedly back up. The department was reportedly looking at them to see if they conformed with a court ruling in the SAVE Plan case.
It was the Biden Administration – not the Trump Administration – that took the form down for review.
Public Service Loan Forgiveness Remains Unchanged
The Public Service Loan Forgiveness Program (PSLF), which promises student loan forgiveness for any borrower who works 10 years in public service, was created by an act of Congress and only an act of Congress can shut it down.
The Trump Administration recently issued an executive action calling for restrictions on who qualifies for PSLF. The plan is to exclude borrowers who work for organizations “that engage in activities that have a substantial illegal purpose,” including a broad sweeping list of employer and job types.
These changes cannot be implemented immediately, though, and will need to go through a rulemaking process.
In the meantime, the Federal Student Aid website makes clear, “There are no changes to PSLF currently, and borrowers do not need to take any action.”
Borrowers in the SAVE legal limbo should know that the months they’re spending in an administrative forbearance, not making payments, will not count toward PSLF.