What student loan borrowers need to know ahead of mandatory collections

Stocks are rallying after President Trump announced he is not trying to fire the Fed chair. Millions of student loan borrowers were also about to face collections for the first time in five years. Starting May 5th, the Education Department is resuming debt collection on loans that went into default before the pandemic, even as it lays off staff from the agency that helps manage those loans. Collections had been paused due to the pandemic. Officials say resuming them protects taxpayers, but critics warn the move could push more families into financial trouble. Let's bring in ABC's Alex Brachet and Business Report Alexis Christopherus to unpack this a little bit more. So Alexis, let's just start with the basics. What do affected borrowers need to know? You're talking about five million people here, Diane, who have defaulted on their student loans, meaning they have not made a payment in at least 270 days. That's about nine months. We have another four million borrowers on the brink of being in default. And remember, this is the first time the government is coming for these payments since March of 2020. So for some people, they've never had to make a payment on their student loans without consequence. And that's the big difference. So if they do not make a payment, there are going to be serious consequences. Borrowers should look out for something in the mail. In the next two weeks, the government is going to be reaching out to these folks to let them know they are in default, to urge them to take action to get out of default and to make good on those loans before they have to take other action. Alex, last month, President Trump said he wanted the Small Business Administration to handle student loans. But this new guidance is coming from the Department of Education. So where are these payments going and how are they being managed, given the mass layoffs at the department? Well, Diane, I mean, I think that's part of the overall confusion here. So obviously the winding down of the Department of Education, using federal student aid through the Small Business Administration. But then we talk about like even wage garnishments and some of the things that were announced earlier this week. And that's something that's usually handled by the IRS. And so a lot of borrowers are saying that they're confused as to where these payments are actually going. I think the bottom line is that if you have federal student loans, your servicer, which for many people, that's AidVantage, some people that's Mohela, that is going to continue as is. But if you have any questions, advocates tell us that you can always go to studentaid.gov and that will tell you who is servicing your loans to make sure that those payments are on time. Now, Alexis, the Department of Education also says they will restart administrative wage garnishment, meaning they can just go into your income and pull it out of your paycheck before you even get that paycheck. So how is that part of this going to work? So it is part of it. There are other things the government can do, and they would lay this out to you in a letter at least 30 days before it were to happen. So it's not just going to magically happen on May 5th if you've defaulted on your loan, that now part of your salary will go to the government. You'll be given ample time to know that's happening, which is why they want you to take action to prevent it from happening. But the government has the right to take 15 percent of your after-tax income to pay off your loan. They can also take 100 percent of your tax refund. They can take 15 percent of Social Security benefits. So there are real consequences here, which is why you can't ignore these notices and you need to make every possible effort to pay down the loan. Alex, how much money does the government stand to recoup by sending these debts to collection? Well, I mean, Diane, this is a huge portfolio. We're talking about a huge pot of money, some $1.6 trillion in student loans are a part of that overall portfolio. And when you talk about two out of five Americans being or currently not making repayments, I mean, that is a huge chunk of that pie. And this is something that the White House has said, you know, times run up on this, these COVID pauses, and they need to get some of that money back. Alexis, former Undersecretary James Cavall told ABC News that defaults can be devastating. In some cases, they can hurt your credit score. They can impact future student aid. Some states will even revoke your driver's license. So how can people avoid that? Yeah, and it can stay on your credit score, by the way, your credit report for seven years if you wind up really defaulting on these loans and not doing anything about it. So there are some things you can do proactively. You do want to go to, Alex mentioned a moment ago, going to studentaid.gov. That's going to have a lot of resources for you. And tap into the government's default resolution group. There you can enroll in an income-driven repayment plan, which means that your repayments are going to be tied to how much money you make. So that amount might be different for different people. You can also sign up for loan rehabilitation, and that means you are agreeing to pay on time for nine consecutive months to get yourself out of debt. And borrowers can also consolidate their loan debt into a new direct consolidated loan. What you want to do, though, is show the government you're making every effort to make these payments. All right. Business reporter Alexis Christopherus, ABC's Alex Prasche. Thank you both.