Education Dept. delays seizing tax refunds from student loan debtors

The U.S. Department of Education said Friday it would delay involuntary collections of student loan debt by garnishing wages and seizing tax refunds.

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The temporary delay will allow the Education Department to implement major student loan repayment reforms under the One Big Beautiful Bill Act to give borrowers more ways to repay their loans. The changes will include simplifying repayment options and providing another opportunity for borrowers to “rehabilitate” their federal student loans. Loan rehabilitation is a way to get a student loan out of default by making a certain number of consecutive, on-time payments to the loan holder under a rehabilitation agreement. 

The OBBBA reduces the number of federal student loan repayment plans, enabling borrowers to select either a single standard repayment plan or an income-driven repayment plan that meets their needs. This includes a new IDR plan that waives unpaid interest for borrowers with on-time payments whose payments do not fully cover accrued interest, and that includes small matching payments from the Education Department in certain circumstances to ensure that outstanding principal is reduced each month. 

The plan will be available for borrowers starting July 1, 2026. According to the Education Department, the delay in collections will give defaulted borrowers more time to evaluate the new repayment options once they consolidate their loans or complete a repayment or rehabilitation agreement. 

The OBBBA also gives borrowers a second chance to rehabilitate a defaulted loan, allowing them to get their repayments back on track and get the loan out of default. Before passage of the OBBBA last July, the law only permitted borrowers a single rehabilitation opportunity. The delay in collections will give defaulted borrowers more time to begin the rehabilitation process, including the ability to rehabilitate their loan a second time. However, it is unclear how long the delay will last.

“There is a pause on that at the moment,” said Secretary of Education Linda McMahon during a press conference. “During the previous administration, I think the whole repayment of loan issue became just so confusing. People just stopped paying. They didn’t know if their loan was going to be forgiven or how much of it was going to be forgiven. Why should I pay? Some people did keep paying. But we had an incredible falloff in people repaying their loans. We’ve now put that back into play. We just started collecting again, to say, ‘You’re in default. You don’t want this on your credit score. You need to come now.’ Under the One Big Beautiful Bill, there is a set program for payment. They’re not all of these many, many different, confusing programs. So we’ve now collected about $500 million. The next phase to go into place was garnishment, and that’s been put on pause.”

The Education Department announced last month that it would begin sending notices the week of Jan. 7 to defaulted borrowers notifying them they’re subject to wage garnishment after a five-year hiatus. An advocacy group for student loan borrowers praised the latest change in policy as the Trump administration puts more emphasis on responding to complaints about affordability.

“After months of pressure and countless horror stories from borrowers, the Trump administration says it has abandoned plans to snatch working people’s hard-earned money directly from their paychecks and tax refunds simply for falling behind on their student loans,” said Aissa Canchola Bañez, policy director at Protect Borrowers, in a statement Friday. “Amidst the growing affordability crisis, the Administration’s plans would have been economically reckless and would have risked pushing nearly 9 million defaulted borrowers even further into debt. Earlier this month, a coalition of partners sent an urgent letter to ED urging them to do just this. We are pleased to see they have heeded our calls.”

However, other issues remain with taxation related to student loan debt, including a so-called “tax bomb” on student loan forgiveness that is returning this year.