Millions of Americans in default on their federal student loans could face wage garnishment and see their tax refunds seized next year as the Trump administration again prepares to restart involuntary debt collection.
The Washington Sun spoke with sources close to the administration who said that officials are preparing to impose financial consequences on defaulted borrowers in 2027 after repeatedly delaying those measures.
Specifically, the Treasury Department is moving toward hiring private debt collectors, potentially as soon as November.
“For borrowers already struggling to make ends meet, wage garnishment will turn a difficult financial situation into a much worse one,” Michael Ryan, a finance expert and the founder of MichaelRyanMoney.com, told Newsweek. “Once the government starts taking money directly from your paycheck, you lose control over when and how much you can afford to pay.”
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Why It Matters
Nearly 10 million federal student loan borrowers are currently in default. If they remain that way, they could soon see their wages garnished and even lose out on portions of certain federal benefits.
With that said, borrowers are generally required to receive advance notice before those collections begin so that they have an opportunity to contest the debt or get out of default.
According to the National Consumer Law Center, the government may take up to 15 percent of a defaulted borrower's wages and has the power to intercept federal tax refunds and offset Social Security benefits.
What to Know
The Washington Sun reported that nearly 10 million Americans are in default on their federal student loans.
Last year, the White House Office of Management and Budget assisted the Education Department in preparing to seize wages and federal benefits, but Treasury officials resisted moving forward because of concerns about the economic consequences for financially vulnerable workers.
The administration subsequently delayed its involuntary collections, but time could be running out for borrowers.
“What worries me is the domino effect. Someone falls behind on a student loan, then loses part of their paycheck....And suddenly they're struggling to cover rent, groceries or their car payment,” Ryan said. “You can't collect money that a household doesn't have without creating consequences somewhere else.”
How Student Loan Wage Garnishment Works
Wage garnishment is when the federal government collects a defaulted student loan directly from a borrower's paycheck.
"If you have defaulted on your federal student loans, the government can tell your employer to withhold up to 15 percent of your wages to collect your student loans without taking you to court,” the National Consumer Law Center (NCLC) says on its website.
That wage garnishment can generally continue until the debt is repaid or the borrower gets out of default. However, the borrower isn't supposed to wake up one morning and discover 15 percent missing from a paycheck without warning.
The government is generally required to send notice at least 30 days before initiating administrative wage garnishment, according to the NCLC. The notice should explain that garnishment is approaching and present options for avoiding or reducing it.
Social Security and Tax Refunds Could Also Be Hit
Wages aren't the government's only collection tool. The Treasury Offset Program also allows the government to intercept some federal benefits, including Social Security retirement and disability benefits.
“With periods of forbearance during the pandemic and due to legal disputes over past programs having long since expired, a stronger approach is being taken to enforcing repayment,” Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, told Newsweek.
According to the NCLC, the government may withhold up to 15 percent of Social Security retirement or disability benefits, provided the remaining monthly benefit does not fall below $750. Supplemental Security Income and veterans' benefits are not subject to the same student loan garnishment, however.
“While borrowers have been avoiding it, the reality is now is the time if they haven't already done so to start making plans to tackle their debt load,” Beene said. “If they don't, they're going to more than likely start to see smaller paychecks when these garnishments take effect.”
What Should Borrowers Do Before Garnishment Starts?
Borrowers already in default may have several possible ways to prevent involuntary collections from beginning.
Loan rehabilitation
Federal student loan rehabilitation can restore defaulted loans to good standing after the borrower makes at least nine monthly payments.
Rehabilitation can also have a credit-reporting benefit because references to the loan's default status can be removed.
“Don't ignore a default notice,” Ryan said. “Check your loan status, contact the federal loan holder and explore rehabilitation or consolidation before garnishment begins. The temporary pause is an opportunity to act, not a reason to wait.”
Consolidation
Some borrowers can also resolve default by obtaining a new federal Direct Consolidation Loan that pays off the defaulted debt. That can be faster than rehabilitation, but it also carries tradeoffs.
Borrowers already experiencing wage garnishment may not be able to consolidate, and this can also affect repayment plan options and any previous progress toward forgiveness.
“Those who have had their student loans forgiven but may owe taxes are another group that needs to be educated,” Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek.
“If you had a rather large loan forgiven and it was not exempt from taxation, that amount could be reported to the IRS as taxable income. Now, you could find yourself in the same pickle once again, potentially owing taxes, penalties and interest on a loan you thought was behind you.”
Contesting collection
You also have the right to challenge the government's collection action, disputing whether the debt is valid or even requesting relief based on hardship.
“Student loan defaults are rising, and many borrowers are simply moving on from debt they seemingly will never be able to repay,” Thompson said. “This could become a spiraling process as defaults begin showing up on credit reports, ultimately making an already difficult financial situation even worse.”
What Happens Next
Based on the Sun report, the Treasury could begin hiring private collection agencies as soon as November, and more aggressive collection efforts could begin in 2027.
If these efforts move forward, the ramifications could be quite severe for borrowers, Thompson said.
“Getting access to capital, securing certain jobs, or even finding a place to live could become more difficult because of damaged credit and wage garnishments,” he said. “Think about the implications. You're already struggling to repay your student loans, and now your wages are being garnished, your credit is deteriorating, and your ability to improve your financial situation becomes even more difficult. This could get bad very quickly.”
Newsweek’s reporters and editors used Martyn, our AI assistant, to produce this story. Learn more about Martyn here.
Contact Newsweek editors on this story: Jason Lemon and Dave Siminoff.