By Arkansas Black Vitality

April 27, 2025 – Five years after the start of the COVID-19 pandemic, the Trump administration will give debt collectors back the power to pursue millions of Americans who have defaulted on student loans.

In a strongly worded announcement on Monday (April 21), the U.S. Department of Education (DOE) said its Office of Federal Student Aid (FSA) will resume collections of its defaulted federal student loan portfolio on Monday, May 5.

In explaining the new mandate, DOE officials said resuming collections protects taxpayers from shouldering the cost of federal student loans that borrowers willingly undertook to finance their postsecondary education. This initiative will be paired with a comprehensive communications and outreach campaign to ensure borrowers understand how to return to repayment or get out of default. 

“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” said U.S. Secretary of Education Linda McMahon. “The Biden Administration misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear. Hundreds of billions have already been transferred to taxpayers.”

McMahon said the Department of Education and the Department of the Treasury will oversee the student loan program. However, the Trump administration is also taking steps to dismantle the DOE and return regulatory oversight for education in the U.S. back to states.

Under an executive order by former President Biden, the Department of Education enacted a three-part plan in August 2022 offering “targeted debt relief as part of a comprehensive effort to address the burden of growing college costs and make the student loan system more manageable for working families.”

Under Biden’s mandate, the DOE also provided student loan borrowers making less than $125,000 ($250,000 for couples) up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the federal government and up to $10,000 in debt cancellation to non-Pell Grant recipients.  High-income individuals or households, in the top 5% of incomes, were not eligible for the debt relief.

In announcing the debt relief plan, Biden said up to 43 million borrowers were eligible for the program, including 20 million borrowers who would have their remaining balance cancelled. He also noted that Black students are more likely to have to borrow for school, more likely to take out larger loans, and twice as likely to have received Pell Grants compared to their white peers

“By targeting relief to borrowers with the highest economic need, the Administration’s actions are likely to help narrow the racial wealth gap,” said Biden.

Only a few months after the executive order went into effect, former Arkansas Attorney General Leslie Rutledge and other attorney generals from Republican states filed sverald federal lawsuits against Biden, former Secretary of Education Miguel Cardona, and the DOE for violating federal law, the constitutional principle of separation of powers, and the Administrative Procedure Act. 

After several decisions and appeals in various federal courts, the U.S. Supreme Court ruled on June 30, 2023, that the Biden administration overstepped its authority last year when it announced that it would cancel up to $400 billion in student loans. In a 6-3 ruling in Biden v. Nebraska—with a majority opinion written by Chief Justice John G. Roberts—the Court concluded that an act of Congress that empowers the Secretary of Education to “waive or modify” financial assistance programs “does not allow the Secretary to rewrite that statute to the extent of canceling $430 billion of student loan principal.”

Not to be defeated, four days before leaving office on Jan. 16, Biden approved student loan forgiveness of more than $600 million for 4,550 borrowers through the Income-Based Repayment (IBR) Plan and 4,100 individual borrower defense approvals. The DOE also took additional actions to allow students who attended certain schools that have since closed to qualify for student loan discharges.

According to the Trump administration, 42.7 million borrowers today owe more than $1.6 trillion in student debt. More than 5 million borrowers have not made a monthly payment in over 360 days and sit in default—many for more than 7 years—and 4 million borrowers are in late-stage delinquency (91-180 days). As a result, DOE officials said, almost 10 million borrowers could default in a few months.

Of those borrowers, 38% are in repayment and current on their student loans. Most of the remaining borrowers are either delinquent on their payments, in an interest-free forbearance, or in an interest-free deferment. Officials said some borrowers are in a 6-month grace period or are in school.

Beginning May 5, the FSA will restart the Treasury Offset Program, administered by the U.S. Department of the Treasury. Over the next two weeks, all borrowers in default will receive email communications from the FSA, making them aware of these developments and urging them to contact the Default Resolution Group to make a monthly payment, enroll in an income-driven repayment plan, or sign up for loan rehabilitation. Later this summer, the FSA will send notices beginning administrative wage garnishment. 

The Department will also authorize guaranty agencies and student loan servicers to begin involuntary collection activities on loans under the Federal Family Education Loan Program. All FSA collection activities are required under the Higher Education Act and conducted only after student and parent borrowers have been provided sufficient notice and opportunity to repay their loans under the law.

The Trump administration said it is committed to helping student loan borrowers find payment options that will put them on a productive path toward repaying their federal student loans. Over the next two months, the FSA will conduct a communications campaign to engage all borrowers through emails and social media, reminding them of their obligations and providing resources and support to assist them in selecting the best repayment plan.

FSA will also launch an enhanced Income-Driven Repayment (IDR) process, simplifying the time it takes borrowers to enroll in IDR plans and eliminating the need to recertify their income every year. More information will be posted on StudentAid.gov next week. 

The Trump administration also intends to enlist its partner states, higher education institutions, financial aid administrators, college access and success organizations, third-party servicers, and other stakeholders to assist in the outreach campaign. Detailed information to help borrowers escape default is also available at StudentAid.gov/end-default.     

Student loan bubble burst could lead to recession, millions with lower credit scores

According to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit, total U.S. household debt increased by $93 billion (0.5%) at the end of 2024 to $18.04 trillion. As noted, $1.61 trillion of that total is student loan debt. Only mortgage and auto debt, at $12.6 trillion and $1.65 trillion, are higher.

Since federal student loan payments resumed in October 2023 after a 3½ year pause due to the COVID-19 pandemic, about half of borrowers in repayment (17.8 million) were current on their loan payments as of January 31, 2024. These borrowers accounted for approximately $706 billion in loans.

The DOE announcement also comes just days after a new report from FICO showed that the first wave of student loan delinquencies dropped the national average FICO score one point — from 716 in January to 715 in February. “The month-over-month increase in the 30-plus day delinquency metric is being primarily driven by missed student loan payments as opposed to delinquency on other credit products such as auto loans, credit cards and mortgages,” said Tommy Lee, senior director of analytics and scores at FICO

As DOE collections and garnishment loom, some economic experts say the Trump administration’s action could cause the student loan bubble to burst. Working-class families are already contending with inflation and rising prices on various consumer goods, including eggs, orange juice, smartphones, and new cars. Experts warn that millions defaulting on student loan debt could potentially lead to a recession in the already unstable economy.

According to the New York Fed’s most recent Liberty Street Economics report, delinquencies will hit credit reports over a rolling window as borrowers with missed payments advance beyond 90 days past due. As such, the Fed’s upcoming first quarter Quarterly Report on Household Debt and Credit will likely reveal a significant uptick in the delinquency rate for student loans, but the size of this increase is difficult to pin down. 

“According to these numbers, it is reasonable to expect student loan delinquency to surpass pre-pandemic levels when new delinquencies hit credit reports,” the report stated. “Although some of these borrowers may be able to cure their delinquencies—either through making up missed payments or by entering an administrative forbearance with their loan servicers—the damage to their credit standing will have already been done and will remain on their credit reports for seven years.”

According to the Federal Reserve analysis, student loan borrowers with superprime credit scores (760 or higher) could see an average credit score drop  171 points associated with a new delinquency. Those with subprime credit scores (less than 620) can expect on average declines of 87 points.