Student loan borrowers who are in default now have some good news when it comes to debt collection.
The U.S. Department of Education announced Friday, Jan. 16, that it will delay implementing involuntary collections on federal student loans, including administrative wage garnishment and the Treasury Offset Program.
It’s unclear, based on the Education Department’s statement, how long the temporary delay will last. More details likely will be ahead.
It’s a temporary delay, but it might help ease some worries about whether you’d immediately lose your tax refund to debt collection as the 2026 tax season approaches.
This tax season is expected to provide sizable refunds to many people, which could drive consumer spending and keep the economy growing.
But millions of student loan borrowers in default risked seeing their wages garnished and tax refunds seized, as the long forbearance program that began during the COVID pandemic unwinds and debt collection involving tax refunds and wages resumed.
The change comes after much political heat from advocacy groups, including an urgent letter sent in January to the Education Department calling for a delay to avoid what groups called “an unprecedented default crisis” ahead.
Aissa Canchola Bañez, policy director at Protect Borrowers, said in a statement Friday that the Trump administration’s earlier plan would have been “economically reckless and would have risked pushing nearly 9 million defaulted borrowers even further into debt.”
“After months of pressure and countless horror stories from borrowers, the Trump administration says it has abandoned plans to snatch working people’s hard-earned money directly from their paychecks and tax refunds simply for falling behind on their student loans,” said Canchola Bañez of Protect Borrowers, formerly called the Student Borrower Protection Center, a nonprofit advocacy organization.
The National Consumer Law Center said Friday’s announcement “throws a lifeline to working and middle class families.”
Abby Shafroth, managing director of advocacy at the National Consumer Law Center, said student loan borrowers are “buckling under the weight of outdated student loan policies that don’t reflect today’s high cost of living and affordability crisis.”
She said existing policies and protections were set decades ago and have not been updated to reflect how much money people need to live on, given the sizable increases in prices and the cost of living.
For example, Shafroth said, the Education Department protects only the first $217.50 per week in wages from garnishment, an amount set in 2009.
Similarly, she said, the Education Department protects only the first $750 per month of Social Security benefits from seizure, a protection set in 1996. This summer, the Education Department had paused a plan to resume garnishing Social Security benefits.
Without reform, she said, “turning on collection, largely paused since 2020, would therefore put working families and older adults who fall behind on student loans at risk of being pushed into poverty by the federal government.”
Reforms, Shafroth said, should include increasing the amount of income protected for basic needs set decades ago to reflect today’s much higher cost of living.
According to the Education Department, the temporary delay announced Jan. 16 gives the department more time to implement major student loan repayment reforms under the Working Families Tax Cuts Act, which passed last year.
And that should give borrowers more options to repay their loans to avoid debt collection.
The changes include simplifying repayment options and providing an additional opportunity for borrowers to rehabilitate their federal student loans.
The working families act “reduces the number of federal student loan repayment plans, eliminating a confusing maze of options and making it easier for borrowers to select either a single standard repayment plan or income-driven repayment plan that best meets their needs,” according to the Education Department.
A new income-driven repayment plan waives unpaid interest for borrowers with on-time payments whose payments do not fully cover accrued interest, the Education Department said, and that includes small matching payments from the Education Department in certain circumstances to ensure that outstanding principal is reduced each month.
The new plan will be available for borrowers beginning July 1, 2026, the Education Department said.
“The delay in collections will give defaulted borrowers additional time to evaluate these new repayment options once they consolidate their loans or complete a repayment or rehabilitation agreement.”
Under the act, borrowers now have a second chance to rehabilitate a defaulted loan, allowing them to get their repayments back on track and get the loan out of default.
Prior to passage of the act, the law permitted borrowers only a single shot at rehabilitation.
“The delay in collections will give defaulted borrowers additional time to begin the rehabilitation process, including the ability to rehabilitate their loan a second time,” the Education Department said.
During the delay, the department is encouraging borrowers in default to explore their options for resolving their defaulted student loans with the defaulted federal loan servicer.
The department is continuing to report student loan defaults to credit reporting agencies, the Education Department said, which may adversely impact borrower credit reports.
Mark Kantrowitz, a student loan expert and author, noted that federal income tax refunds were last offset for defaulted federal student loans in 2019, prior to the pandemic.
About 1.4 million federal income tax refunds were offset then, he said, about 15.2% of the total number of defaulted borrowers.
The Coronavirus Aid, Relief, and Economic Security Act, which was passed by Congress on March 25, 2020, suspended enforced collections for the duration of the payment pause. And there were further extensions to the payment pause.
Kantrowitz estimates that almost 11 million borrowers will be in default by the end of March 2026. By his estimate, some 1.6 million borrowers likely would have had their federal income tax refunds offset. “But, it could be more,” he said.
“The federal government usually offsets the full income tax refund amount,” Kantrowitz said.
“The only exception is when less than the full amount is needed to satisfy the defaulted federal student loan debt.”
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.
This article originally appeared on Detroit Free Press: Student loan borrowers in default now able to keep tax refunds
Reporting by Susan Tompor, Detroit Free Press / Detroit Free Press
USA TODAY Network via Reuters Connect
