US Tells Millions Of Student Loan Borrowers To Pay Up — Forgiveness Off The Table, Wage Garnishment Could Follow

The US Department of Education has started notifying over 7.5 million federal student loan borrowers enrolled in the now-defunct SAVE repayment plan that they must select a new, lawful repayment option or face automatic enrolment in a standard plan. The guidance follows a court-approved settlement that formally ended the Biden-era Saving on a Valuable Education (SAVE) programme after repeated legal challenges found it unlawful, the Department of Education confirmed.

Under Secretary of Education Nicholas Kent addressed the situation at the American Enterprise Institute last week. 'What we have been trying to do is explain to borrowers that loan forgiveness is not happening,' he said. 'Not paying your loans is no longer an option, especially under this administration.'

His remarks were aimed at two groups. The SAVE borrowers have sat in forbearance for nearly two years while courts battled over the plan's legality and must now pick a replacement. Separately, about 8.8 million borrowers are in default on their federal loans, with some having gone more than six years without making a single payment, Investopedia reported.

Federal loan servicers will begin issuing formal notices from 1 July, giving borrowers at least 90 days to choose a legal repayment plan. Those who do not act will be automatically placed on the Standard Repayment Plan or the new Tiered Standard Plan.

New Repayment Plan As Treasury Takes Over Defaulted Loans

Alongside the crackdown, the administration is rolling out the Repayment Assistance Plan, created under the One Big, Beautiful Bill Act and available from 1 July. RAP ties monthly payments to income, charging between 1 and 10 per cent of a borrower's adjusted gross income, depending on earnings and number of dependants.

Those earning $10,000 (£7,400) or less annually face a minimum payment of $10 (£7.40) a month. The plan includes a government interest subsidy and a $50 (£37) monthly principal reduction guarantee to stop balances from growing.

Remaining debt is forgiven after 30 years, a decade longer than earlier income-driven plans allowed. Policy analysts have flagged that many lower-income borrowers could actually face higher monthly bills under RAP than they would have under SAVE.

The Education Department has also begun handing operational control of defaulted loan collections to the Treasury Department under an interagency agreement struck on 19 March.

Defaulted borrowers collectively hold roughly $180 billion (£133 billion) in outstanding debt, about 11 per cent of the federal government's total $1.7 trillion (£1.26 trillion) student loan portfolio, Politico wrote.

Treasury Secretary Scott Bessent said the partnership would bring 'long overdue financial discipline' to a portfolio that had been 'badly mismanaged for years.'

Wage Garnishment Returns For Borrowers In Default

Kent said the department would prefer starting with voluntary tools before turning to aggressive collection. But he was clear that enforcement mechanisms remain on the table. Administrative wage garnishment allows the government to withhold up to 15 per cent of a borrower's wages or federal benefits, including Social Security, without a court order.

'While we have tools like administrative wage garnishment and Treasury offset, we want to make sure that we don't start with those tools,' Kent said. 'We are starting with tools that will help borrowers for the long term.'

Federal student loan collections were suspended in March 2020 at the onset of the Covid-19 pandemic. What was intended as temporary relief stretched across five years through extensions and legal battles. Today, fewer than 40 per cent of the nation's roughly 43 million borrowers are actively making payments. Close to one in four is in default.

The Treasury transfer has drawn sharp criticism from Senate Democrats. Elizabeth Warren and four colleagues wrote to Education Secretary Linda McMahon calling it an 'illegal scheme' that would trap borrowers in additional bureaucracy. The administration has argued the agreement is authorised under the Economy Act.

For borrowers already in default, loan rehabilitation - previously limited to a single use - will become available a second time per borrower from 1 July 2027 under the new legislation. The Education Department has urged all affected borrowers to visit StudentAid.gov or contact their loan servicer before the July deadline.