The Trump administration is preparing to unleash private debt collectors on millions of Americans in default on their federal student loans, with Treasury officials moving to sign collection contracts as soon as November, according to reports.
Five sources familiar with the plans told the Washington Sun that the administration is gearing up to impose financial penalties on nearly 10 million borrowers in default next year, though the sources said the plans are unlikely to be announced before the November 3 midterm elections. One source put it bluntly: “It would be politically insane to do this before the midterms.”
Wages, refunds and benefits on the line
A federal student loan goes into default after about nine months of missed payments. Once that happens, the government can take money without the borrower’s permission in two main ways, according to reports. The first is offset: intercepting tax refunds, part of Social Security cheques, and credits such as the Earned Income Tax Credit and the Child Tax Credit. The second is wage garnishment, where employers must withhold up to 15 per cent of a borrower’s pay.
Some officials are pushing to start both for the current tax year, meaning borrowers filing by the April 15, 2027 deadline could see refunds seized, though sources cautioned the start date could slip while Treasury’s new Defaulted Loans Support Center, launched October 12, gets fully running, according to reports.
An internal fight over the 1.7 trillion dollar portfolio
The planning reveals deep divisions over the government’s 1.7 trillion dollar student loan portfolio. Last year, the White House budget office began helping the Education Department prepare to seize benefits and wages from defaulted borrowers, but Treasury officials blocked the effort over concerns about the economic damage of taking workers’ money, according to reports.
Treasury instead unveiled an online portal to help borrowers track what they owe, and the administration says its preference remains voluntary repayment. But with defaults at record levels, the collectors may be coming regardless.
