Department of Education

Education Department To Suspend Payments, Refund Garnished Wages and Tax Returns for Student Loan Borrowers in Default

Education Department says its goal is to make sure borrowers in default get their tax refunds.

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The Education Department announced on Tuesday that it will freeze collections and return garnished wages and tax refunds to student loan borrowers who have defaulted on their Federal Family Education Loans (FFEL). More than 1 million borrowers will be covered by the new policy, and they will join 40 million other Americans who, since March 2020, have not accrued interest or been required to make payments on student loans already owned by the Education Department. 

Exactly who are the borrowers in this category? Anyone who took out a Stafford or PLUS student loan prior to 2010 borrowed that money from a commercial lender with a federal guarantee under the FFEL program. If your FFEL loan is in good standing, congratulations! Your loan remains with a commercial lender and Tuesday's action does not apply to you. However, if you defaulted on your FFEL loan and it has been transferred to a federally funded guaranty agency—but has not been in default so long that the guaranty agency has already transferred collections to the Education Department (in which case, it was already frozen)—then you are the intended beneficiary of Tuesday's announcement. Your loan repayment will be frozen until at least September 2021, any wages or taxes garnished since March 2020 will likely be returned (at some point), your loan will be restored to good standing, your credit score will hopefully be depenalized, and you will have the option to request a refund of any voluntary payments you made on your defaulted loan during the pandemic. 

I qualified many parts of the above because the Education Department does not yet know exactly how many people will benefit from this policy, exactly how much money will be taken from the Treasury in the form of refunded garnishments, how it will return garnishments or refund voluntary payments, or how it will coordinate the various parties needed to make this policy work. For instance, assuming the Education Department can quickly identify every borrower who will be affected by Tuesday's announcement, it can probably stop the IRS from withholding their 2020 tax refunds, unless, perhaps, those people have already filed. But how quickly can it identify—or get guaranty firms to identify—which employers should stop garnishing defaulted borrower's wages and communicate that information to them?

If this policy turns out to be a hot mess, it will largely be because the FFEL program was a hot mess. 

Under FFEL, the Education Department paid commercial lenders a fee to lend to students and their parents. When a borrower enters repayment and defaults, the commercial lender files a claim with a guaranty agency; the guaranty agency then uses Education Department funds to buy the loan from the commercial lender for about 97 cents on the dollar; that guaranty agency then charges the Education Department to collect on the loan and contracts collections out to various other firms. If the guaranty agency's debt collection contractors can't collect, the Education Department takes over loan service and collections. 

As that chain of responsibility suggests, FFEL was a case study in moral hazard. Not only did lenders and guaranty agencies make money without taking on risk, but annual limits on how much each student could borrow incentivized lending to as many people as possible, regardless of whether they were likely to complete their degree or had enrolled in an institution that was preparing them for gainful employment. 

In the wake of the 2008 mortgage crisis, many private lenders no longer had the capital to issue new FFEL loan disbursements to students who were already enrolled, which left students in the lurch. Asking colleges to charge a fraction of their pre-crisis rates overnight was out of the question, so Congress allowed the Education Department to buy newly issued FFEL loans from the very banks the department had previously paid to issue those loans so that students could continue borrowing. Ultimately, the Education Department purchased roughly $150 billion in FFEL loans issued between 2007 and 2009. 

The Education Department's FFEL purchase in 2009 is why some FFEL borrowers have already benefited from the loan repayment freeze. Other FFEL borrowers have already benefited from the freeze because they were in default so long that their debt had already been moved from the commercial lender to the guaranty agency to the Education Department. To complicate matters further, some guaranty agencies that are servicing FFEL defaulted loans voluntarily froze repayment at the same time the Education Department did. This makes total sense, in a way, because the Education Department already owns the loans that commercial lenders have transferred to the guaranty agencies, but the Education Department does not know exactly which FFEL borrowers in default whose debt remains in the care of guaranty agencies have had their payments frozen. 

Again, if this all sounds ridiculously complicated and poorly designed, that's because it is. Congress killed the FFEL program in 2010 for all the reasons mentioned above and replaced it with Federal Direct Loans, or FDLs, all of which have been frozen since March 2020. But FFEL's complexity still haunts us because some 8 million FFEL borrowers are still out there, chipping away (or not!) at their ballooning balances. 

While there are likely some deadbeats among the beneficiaries of Tuesday's announcement, the median borrower who is struggling to make minimum payments on loans issued prior to 2010—with some active FFEL loans dating back to the 1990s—probably does need some debt relief and isn't providing much in the way of garnishment regardless. If you believe in means testing, Tuesday's policy is better than the blanket freeze on all student loans owned by the Department of Education, which benefitted not just households that lost income, but also white-collar workers who didn't miss a paycheck over the last year. 

However, we should consider whether the Education Department is creating a new moral hazard or other bad incentives. For instance, Tuesday's announcement says that "any of these [FFEL] loans that went into default since March 13, 2020, will be returned to good standing. The guaranty agencies that hold those loans will assign them to the Department and request that the credit bureaus remove the record of default." Might some people interpret that to mean they can or should default on FFEL loans that they are currently repaying? What if you defaulted earlier in the pandemic but can now afford repayment—why bother? What message does this send to the 5 million FFEL borrowers whose loans remain with commercial lenders? What message does this send to people who are having their wages garnished for other kinds of debt? What about people who defaulted before COVID-19 tanked the economy, and the people who will default after the economy recovers? 

Lastly, when are policymakers going to acknowledge that federal student loans have played a major role in driving up the cost of education, and that dipping into the public fisc to pay off debts incurred due to cost inflation is a vicious cycle that is bound to repeat itself?

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  1. Again, if this all sounds ridiculously complicated and poorly designed, that’s because it is.

    But enough about the federal tax code.

    1. We need the feds to get more involved in our lives. They’re just not complicated enough as it is.

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    4. Education Department says its goal is to make sure borrowers in default get their tax refunds…………MORE DETAIL.

  2. Well this sounds promising! Where can I apply to get a refund on the student loan debt I paid off 30 years ago? I swear I was young and stupid at the time and it didn’t occur to me that I didn’t have to pay off the debt and the taxpayers would step in to pay them off for me.

    1. I would like a refund on the college tuition I paid off in full without the use of loans as well. I can prove that I was young and stupid at the time because what rational adult would be stupid enough to think that loans needed to be paid back?

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    2. I’m just amazed seeing progressives champion the most REGRESSIVE social policy in our history.

      1. Well, look who carries most of that debt.

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      2. Gotta pay off their base.
        But the tens of trillions of crony dollars being doled out was totes no reason to blatantly cheat an election!

    3. I didn’t get a student loan.
      I demand reparations.

      1. About right.
        i can see suspending payments temporarily during the pandemic for the unemployed, but refunds and no tax garnishments is going too far. A student loan is a handout in the first place, let alone refunds for welching entirely on your financial responsibility.

    4. No shit. This after we went full tilt to pay off the loan for my wife to become a doctor. I mean, “weesa be poowa fo a long time, Mrs. Jar Jar has medical lie-sense now but wook soo haad! Weesa need sum gubbermint money! It only fare!”

  3. This is what we get when Boomers run the show. If it FFELs good, do it.

    1. Ageist.

    2. Don’t blame the generation that paid for their own tuition by working hard and paying their bills. The deadbeats in OUR crowd went to jail and had wages garnished as a consequence of welching on student loans. I met every obligation of my loan ahead of schedule, and THAT felt good. Honor, integrity, and keeping my word.

  4. We need to make all student loan debt dischargeable in bankruptcy. That will bring the entire scam to an end. Then colleges can offer their product at a price their customers can afford or they can go out of business.

    1. I’d be all for forgiving ALL of the debt, if it came on the back of both a 95% surcharge on all monies in endowments and the removal of tax exempt status for institutions of higher learning.

      1. Treat student loan debt like any other debt, adjust the look back period for clawing back, and let the Feds, banks, and universities fight it out over who owes the deficiency. You don’t need to treat university endowments any differently.

        That such a move would absolutely gut The Academy and nearly wipe out the various Victims Studies departments around the country, is a bonus.

      2. Student loans are a scam for colleges: they get the money with direct payments to the institution from the government, and if they don’t – you get thrown out of college, but you are still responsible for the debt.

  5. …when are policymakers going to acknowledge that federal student loans have played a major role in driving up the cost of education…

    ^^^This

    1. and that dipping into the public fisc to pay off debts incurred due to cost inflation is a vicious cycle that is bound to repeat itself?

      That didn’t happen by mistake.

  6. Great article. But I would expect Reason, of all publishers, to recognize the fallacy of suggesting “COVID-19 tanked the economy.” COVID did not tank the economy, government responses to COVID did. The economy would necessarily have suffered in any case, but state “mandates” throwing millions of people out of work is what was the primary driver of the tankage.

    1. You mistake Reason for libertarians.

      Virtually nobody here is one. They are just progressives not good enough to write for Vox.

    2. New here? Reason equals nouveau urbanism city/central planning progressives.

    3. The economy would necessarily have suffered in any case

      Unclear, our economy has tolerated several multiples more than half a million 65+ yr. olds “departing the workforce” every year for decades.

      1. Well, it probably would have to some extent (though not necessarily, if everyone had kept going to work, the numbers getting sick and dying would have had a very minor effect on productivity). I think that has been the case in past flu pandemics where governments didn’t’ get all authoritarian. But they sure did everything they could to make it as bad as possible this time.

      2. People would have voluntarily stayed away from bars and restaurants; other retail employers would have voluntarily shut down to protect themselves or their employees. Supply chains would have been disrupted (they were already disrupted a year ago before governments even got involved). There absolutely would have been a terrible economic impact on Main Street. But it would not have been as severe as state governments closing down Main Street by fiat.

        In my state, our governor shuttered the state’s largest industry (gaming) overnight. Gaming would have suffered in any case, but it didn’t have to happen this way.

  7. How is this Constitutional? They’re clearly usurping the power of Congress here.

  8. Couldn’t see this coming. Shocking!

  9. The tech revolution is upon us! Work from home is the new realit… oh shit.

    Amazon expects employees back in their offices by autumn

    Amazon told employees Tuesday in a companywide announcement that it is planning a “return to an office-centric culture as our baseline,” signaling that the Seattle-based commerce giant is not planning to embrace a hybrid workplace.

    The transition away from remote work is expected to wrap up by autumn, the note said. Working in offices, the note said, “enables us to invent, collaborate, and learn together most effectively.”

    Amazon had previously given its return-to-office date as June 30, but questions remained as to whether the company would allow some of its 60,000 Seattle-area office employees to continue working from home part time.

    It had seemed unlikely Amazon would allow employees to stay away from the office permanently. The company has a culture of in-person collaboration within “two-pizza teams” — groups small enough to be fed with two pizzas.

    1. LOL

    2. So… Amazon is fat-phobic? Do the pizzas get scaled according to the dimensions of the people in the meeting?

      1. No, the size of the teams. That one guy who eats two pizzas at a go gets to keep working from home.

    3. I’m not surprised. Working from home on a full time basis works okay when everyone is out at the same time and people are forced to interact with everyone using email and phone calls, but the second some people are back in the office the cracks start to show. It’s just plain easier to communicate in person when you can point and don’t have to type out and perfect every question. So the people in the office collaborate together and only use the people outside of the office as a last resort.

      1. Also, as an anecdotal way to check what I just said. Instead of telling me how productive you are when you are out of the office, think about if you’ve ever been happy to find out that a coworker you need something from is working from home today.

      2. Yup. I never stopped going to the office, so I get to do everything for everyone.

  10. “when are policymakers going to acknowledge that federal student loans have played a major role in driving up the cost of education, and that dipping into the public fisc to pay off debts incurred due to cost inflation is a vicious cycle that is bound to repeat itself”

    That’s never gonna happen. Democrats don’t admit defeat and blame their mistakes on others. When the economy crashes and it will, they will be right there blaming capitalism, racism, white surpremacy, fascism, you name it. Anything but point the finger at themselves. We could have avoided this mess but sadly the sociopathic democrat party is once again steering the ship.

  11. All together now: “Free, free, free, free, free, free, free, free, free!”

  12. One has to laugh when 41M ( 1/3 of entire U.S. Workforce ) “owes” the federal government for their “gift” of “obtainable” higher-education. It’s like successfully selling bridges in the Sahara desert… 🙂

    1. It’s the deliberate installation of a system of debt peonage for the section of the population that wanted to improve themselves, and weren’t mechanically skilled enough for the trades. None of this shit is funny at all.

      (But I do see what you mean.)

  13. Biden, “Hey, it’s only other peoples money!”

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  16. “Refund” garnishments? Those are repayments that’ve already been made! This is effectively a new loan.

  17. Boy, am I an idiot. I paid my student loan off. WHYYYYYYY??!!!!!!

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  19. I PAID FOR MY KIDS COLLEGE. NOW I’LL PAY FOR YOURS?

    fortunately, the feds pay these stupid bullshit deals off with pretend money, not tax dollars so the reality is its a shell game

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