Wyden, Merkley to Education Department: Protect Student Borrowers’ Wages and Benefits When Payments Resume

Wyden, Merkley to Education Department: Protect Student Borrowers’ Wages and Benefits When Payments Resume

“Even before the pandemic, collections on defaulted student loans were catastrophic for borrowers in default, who saw their wages, tax refunds, and even Social Security checks confiscated, in addition to being forced to pay exorbitant fees.”

Washington, D.C. – Oregon’s U.S. Senators Ron Wyden and Jeff Merkley today asked how the Department of Education (DoEd) plans to support student borrowers in default as the scheduled end of paused student loan payments, collections and interest approaches in October.

“With student loan and interest payments scheduled to resume on October 1, 2021, and a wave of loan delinquencies and defaults likely to follow, we are concerned about the Department resuming these payment collections and are seeking information about how [the Department] plans to avoid long-term financial harm to borrowers,” Wyden, Merkley and other legislators wrote in a letter to Secretary of Education Miguel Cardona.

“As we near the currently scheduled end of the suspension of payments and collections, we are concerned about plunging borrowers back into an untenable financial situation, causing long-term damage to their credit and financial stability and a sudden unnecessary drag on our recovering economy.

DoEd has a number of administrative options to collect the outstanding debt on defaulted student loans. Through wage garnishments, DoEd is able to collect up to 15 percent of a borrower’s disposable pay to repay the debt. DoEd may also refer the loan to the Treasury Department, which is able to withhold a borrower’s tax refunds – including the newly expanded Child Tax Credit (CTC) and Earned Income Tax Credit (EITC), Social Security or other federal payments – to repay the debt. If a borrower does not enter into a repayment agreement on their defaulted federal student loans, then DoEd refers these defaulted loans to private collections agencies (PCAs) that charge a collection fee amounting to 17.92 percent of the outstanding balance, significantly increasing the amount owed.

 As of March 2020, when the pandemic and economic downturn were just beginning, about 7.7 million borrowers’ loans were in default. Nearly 45 percent of borrowers in default reported that they had not found a path to return their loan to good standing. In 2016, the Government Accountability Office (GAO) found that approximately 114,000 borrowers over age 50 had more than $171 million in Social Security benefits withheld because of defaulted student loans. 

Although the Coronavirus Aid, Relief, Economic Security Act (CARES Act) established relief for borrowers by suspending payments and halting debt collections on defaulted loans, DoEd and Treasury still improperly garnished and withheld at least $200 million from approximately 390,000 borrowers during this time. The failure to fully implement the collections moratorium raises concerns about how DoEd and Treasury will handle the upcoming scheduled resumption of collections and payments on October 1, 2021. 

Wyden and Merkley joined U.S. Sens. Elizabeth Warren, D-Mass., Cory Booker, D-N.J., Bob Menendez D-N.J., Mazie K. Hirono, D-Hawaii, and Brian Schatz, D-Hawaii on the letter. Rep. Ayanna Pressley, D-Mass., led her colleagues in the House.

A copy of this letter is here.