The debt crisis is looming for millions of student loan borrowers across the USA, who may grapple with defaults and wage garnishments as the Department of Education plans to recommence collection efforts. The department noted that 5 million individuals have defaulted on their federal student loans, with an additional 4 million predicted to default in the upcoming months. Starting May 5, defaulted loans will be collected, and some borrowers could face involuntary wage garnishments as a result.
Over the past half-decade, numerous pandemic-related interruptions, legal battles, and administrative changes have created uncertainty and hardship for borrowers. These potential collection efforts have further unsettled many.
A Reddit user shared their plight, seeing no feasible repayment route without offering affordable options or programmes. Defaulted borrowers, who haven't made any payments for 270+ days, could risk up to 15% of their income, tax return, or federal benefits being seized starting this summer. This could significantly impact borrowers' overall financial situation.
Data from a recent Achieve study suggests that many Americans are already finding it difficult to manage their debt. One in three respondents described their debt as overwhelming, and 36% reported that they are unable to pay all their bills on time.
The situation could be particularly tough for student borrowers already burdened with debt and who might now face wage garnishments. Approximately 37% of the borrowers in the Achieve study who missed a payment claimed they did so due to funds running out.
In February, the average FICO score fell, primarily because missed payments from about 2.7 million delinquent student loan borrowers were reported to credit bureaus for the first time in five years. As per the Federal Reserve Bank of New York's research, more than 9 million borrowers could see their credit scores decrease by up to 171 points due to delinquent student loan debt.
According to Achieve, borrowers with lower credit scores are more likely to be burdened by unmanageable debt than those with higher scores. In addition to this, missed payments can stay on a borrower's file for seven years, leading to increased interest rates, decreased credit limits, and limited access to credit.
"Defaulted borrowers do have some options to mitigate the adverse effects of wage garnishments and collections. They can consolidate their loans or engage in a rehabilitation program," states the Department of Education. Delinquent borrowers, who haven't yet reached default status, also have some alternatives like lower payments under an income-driven repayment plan or applying for forbearance.