US Changes Student Loan Collection Plan, Provides Relief to 5 Million Borrowers

Higher education in the United States is notoriously expensive, prompting many students to rely on student loans to fund their studies. These loans must be repaid, often with interest. The U.S. government had planned to recover loan payments directly from students’ salaries or tax refunds, particularly from those who had defaulted on their loans. However, this plan has now been temporarily revised, offering relief to millions of borrowers.

The Trump administration had initially prepared to collect EMI payments automatically from the wages or tax returns of defaulting borrowers. A large number of students who had taken loans but were struggling to repay were affected by this policy.

Federal Student Loans and Eligibility
Federal student loans in the U.S. are primarily available to American citizens, including Indian-origin students who have U.S. citizenship. These loans are designed to make higher education more affordable, offering lower interest rates compared to private loans. Borrowers are expected to start repayment after completing their degrees.

Temporary Halt on Automatic Recovery
The U.S. Department of Education has now suspended automatic wage and tax refund deductions for federal student loans while a new recovery plan is being formulated. Originally, the government planned to begin deductions in January 2026, causing significant anxiety among students.

Existing Loan Recovery Rules
Under current rules, a borrower is considered in default if no payment has been made for 270 days. Once in default, the government can recover the loan amount from the borrower’s salary or tax refunds. During the COVID-19 pandemic, such recovery efforts were temporarily paused, and the government had announced plans to resume them recently. In the first phase, nearly 1,000 borrowers were issued notices.

Scale of the Issue
The U.S. job market has struggled to absorb recent graduates, leaving many student loan borrowers unable to make payments. According to the Department of Education, over 5 million Americans are currently unable to repay their student loans and are classified as in default. Millions more are at risk of defaulting later this year.

The government has indicated that a new student loan recovery plan could be introduced by July 2026, aiming to address the challenges faced by defaulters while balancing repayment requirements.