May 5th Resumption of Federal Student Loan Collections

Article Highlights:

• Historical Pause in Collections
• Current Debt Situation
• Mechanisms of Collection
• Communication and Engagement Efforts
• Support and Resources for Borrowers
• Enhanced Income-Driven Repayment (IDR) Process
• Outreach and Partnerships

As the U.S. Department of Education charts a new path post-pandemic, one significant move is the resumption of federal student loan collections. This initiative, set to commence on May 5, marks the end of a years’ long hiatus in collections on defaulted loans that began in March 2020 due to the COVID-19 pandemic. Here’s an in-depth look at what this means for borrowers and the broader implications.

Background and Current Landscape

1. Historical Pause in Collections: The federal government had paused the collection on student loans as a relief measure during the pandemic. This moratorium allowed borrowers some breathing room during an unprecedented economic downturn. However, the pause not only deferred repayment but resulted in a growing number of loans entering default, with numbers reaching concerning levels.

2. Current Debt Situation: As of now, approximately 42.7 million borrowers owe over $1.6 trillion in federal student loans. Among these, more than 5 million borrowers have defaulted, having missed payments for over 360 days, some for over seven years. This has created a situation where a quarter of the federal loan portfolio could soon be in default.

Resumption of Collections

1. Mechanisms of Collection: The collections will resume through the Treasury Offset Program, enabling involuntary collection actions such as withholding tax refunds and garnishing wages. The Department of Education, through its Office of Federal Student Aid (FSA), will also employ Administrative Wage Garnishment (AWG), which can demand employers withhold up to 15% of a borrower’s disposable income.

2. Communication and Engagement Efforts: The resumption of collections will be coupled with extensive outreach efforts. Borrowers will receive emails from FSA advising them on repayment options, such as income-driven repayment or loan rehabilitation. Furthermore, over the next two months, the FSA plans to conduct a robust communications campaign aimed at boosting borrower awareness and engagement.

Support and Resources for Borrowers - To ease the transition back into repayment, the Department of Education is enhancing support systems:

• Enhanced Income-Driven Repayment (IDR) Process: This process will streamline enrollment into IDR plans, eliminating the need for annual income recertification, which simplifies the borrowers’ experience.
  
  
• Outreach and Partnerships: Collaborations with states, educational institutions, and other stakeholders will play a critical role in guiding borrowers back to repayment. Tools like the Loan Simulator and AI Assistant (Aiden) are being introduced to assist borrowers in choosing the most suitable repayment plan.

Implications and the Road Ahead - The decision to resume collections is seen as necessary to maintain financial responsibility among borrowers and avert potential taxpayer burdens due to defaulted loans. According to the Department, resuming collections aligns with efforts to safeguard taxpayers and ensure that loans, which were willingly undertaken, are repaid.

However, this move also underlines the need for a structured and compassionate approach to assist borrowers re-entering repayment, many of whom are emerging from the financial strain imposed by the pandemic. As the education sector continues to adapt, the focus remains on balancing fiscal responsibility with borrower support, preventing further financial crises while encouraging economic stability.

This thorough approach by the Department of Education reflects a significant shift towards reinstating financial order and ensuring a sustainable path forward for borrowers and the federal loan portfolio alike.

Student Loan Interest Tax Deduction – Taxpayers who have not been paying their loans during the hiatus may have forgotten that there is an “above-the-line” deduction (i.e., a deduction when figuring adjusted gross income (AGI) and available even if not itemizing deductions) for interest payments due and paid on any “qualified student loan,” regardless of when a taxpayer first incurred the loan. A qualified student loan is generally one used to pay qualified higher education expenses, i.e., tuition, room and board, and related expenses for attending post-secondary educational institutions, including certain vocational schools, and certain institutions offering postgraduate training.

The maximum deduction per year is $2,500. This is a per return limit, not a per student limit. However, the amount of the interest that is deductible is phased out for married taxpayers filing a joint return when their modified AGI is $170,000 - $200,000. For unmarried individuals, the phaseout range is $85,000 - $100,000. When income exceeds the top of the phaseout range, no amount of the interest is deductible. No deduction is allowed for those using the married separate filing status.

Lenders that receive $600 or more of student loan interest during the year must file Form 1098-E with the IRS. A copy of it, or an acceptable substitute, must be provided to the borrower. Thus, someone paying less than $600 of student loan interest per year may not receive a 1098-E form, but may still be entitled to a student loan interest deduction if they have documentation of the amount paid.

Please contact this office if you have questions about the student loan interest deduction.