Student loan collections resume as millions are in default. What should they do?

Millions of student loan borrowers got a wake-up call for paying off their debt Monday as the U.S. Department of Education resumed collecting school loans.

Referrals for collection had been put on hold since March 2020 because of the COVID-19 pandemic, when the U.S. government also paused federal student loan payments and interest accrual as a temporary relief measure. Of the nearly 43 million people who owe money, only a little more than a third have made regular payments, according to the Education Department.

The debt would be collected through a Treasury Department program that withholds payments through tax refunds, wages and government benefits, the agency said.

Under the program, the government can withhold entire federal tax refunds and up to 15 percent of a federal worker's disposable pay. The government said the Office of Federal Student Aid would send notices about wage garnishment later this summer.

"American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies," said U.S. Secretary of Education Linda McMahon in a news release announcing the restart of collections on April 21.

Those in default face an uphill battle: failing to make a payment means the government can withhold portions of Social Security benefits and tax refunds and garnish wages. Defaulting on a loan can also tank your credit score, which in turn can make it more difficult to obtain a loan in the future.

"The level of concern here really depends on the reasons a borrower has not paid their federal student loans. If they don't have the capacity, they may be overstretched," Michele Raneri, vice president and head of research at TransUnion, said in a statement. "They may not know they have to pay them, may not be able to find the information on how to do so, or may not have a willingness to pay for one reason or another," she said.

Still, one in five borrowers is "seriously delinquent" or has a past-due payment of 90 days or more, according to a new analysis by TransUnion, a major credit bureau in the U.S. The analysis looks at the percentage of student loan borrowers at risk of default and the impact that has on their credit scores.  

Advocates say student borrowers are stretched thin from inflation and growing worries over the cost of living.

"We're in the worst student loan landscape that we've ever been [in] before," said Sabrina Calazans, executive director of the Student Debt Crisis Center, a nonprofit that advocates for student debt cancellation, NBC News reported.

"The plans and proposals being put forth by the Trump administration are going to harm millions of individuals and families," Calazans added. "It's going to create a financial catastrophe where folks will not be able to meet their basic needs."