The Biden administration aims to prevent a student loan default crisis as garnishments are resumed.

• The Biden administration has taken steps to prevent a default crisis among federal student loan borrowers, as outlined in a new U.S. Department of Education memo obtained by CNBC.
• In some cases, garnishments may resume as early as this summer.
• In 2022, the Education Department stated that approximately 7.5 million federal student loan borrowers were in default.
• That grim figure led to comparisons with the 2008 mortgage crisis.

For the first time in five years, borrowers who have defaulted on their federal student loan debt will face collection action, including wage and retirement benefit garnishment.

A top official in the U.S. Department of Education has revealed in a new memo obtained by CNBC the details of when garnishments may resume, with some cases resuming as early as this summer.

The memo, written prior to the start of the Trump administration, outlines the steps the Biden administration has taken to prevent a default crisis among federal student loan borrowers. It provides strategies for the Department to assist borrowers in staying current on their loans as collection efforts resume this year.

The memo from U.S. Under Secretary of Education James Kvaal to Denise Carter, acting chief operating officer for Federal Student Aid, emphasizes the importance of continuing initiatives and fully implementing the actions outlined in the memo. The Department plans to resume default penalties and mandatory collections later this year.

The Education Department reported that around 7.5 million federal student loan borrowers were in default in 2022, which has been compared to the 2008 mortgage crisis.

Borrowers could face Social Security offsets by August

The Biden administration provided borrowers with a 12-month "on-ramp" to repayment after the federal student loan payment pause expired in September 2023. During this time, borrowers were protected from most of the consequences of falling behind on their payments. However, the relief period ended on Sept. 30, 2024.

Starting in October, federal student loan borrowers in default may have their wages garnished, while Social Security benefit offsets could resume as early as August, according to the Education Department.

30 million individuals could utilize the IRS's free Direct File program. Biden granted student loan forgiveness to an additional 150,000 borrowers. The amount saved by abstaining from alcohol during "dry January" can be calculated.

The Federal Student Aid office of the U.S. Department of Education is instructed to continue the Biden administration's efforts to prevent defaults.

To simplify the enrollment process for affordable repayment plans, such as allowing the department to obtain borrowers' income information from the IRS and automatically enroll borrowers in an income-driven repayment plan if they fall behind on their loans, IDR plans can be designed to base a borrower's monthly bill on their discretionary income and family size, resulting in some borrowers having a $0 monthly bill. Any remaining debt can be canceled after a certain period, typically 20 or 25 years.

Before formally defaulting, borrowers should be screened for other forgiveness opportunities.

The Education Department is advised to investigate ways to enhance the current interest rate incentive for borrowers to make automatic payments to their student loan servicer. Currently, borrowers can receive a 0.25 percentage point reduction in their interest rate if they sign up for automatic payments.

Fewer consequences on defaulted student loans

For the first time, borrowers in default will be able to enroll in the Income-Based Repayment plan and have a pathway to forgiveness, according to a memo. Currently, federal student loan borrowers must exit default before they can access any of the income-driven repayment plans, including IBR.

The Biden administration has mostly abolished collection fees on federal student loans, as stated in the memo.

In early 2024, the department took steps to increase the amount of people's Social Security benefits protected from collection powers. Starting in 2024, those with a monthly Social Security benefit under $1,883 can protect those benefits from offset, compared with the current protected amount of $750 in place today.

The memo states that according to available data, these actions will successfully stop Social Security offsets for over half of the borrowers and decrease the offset amount for numerous others.

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