As of May 5, 2025, the U.S. Department of Education will restart collections on defaulted federal student loans, marking the end of a payment pause that began in March 2020 due to the COVID-19 pandemic. This shift is set to significantly increase activity in the collections space, particularly for businesses operating in debt recovery, financial services, and related sectors. Here’s a straightforward look at what’s happening and why it matters.
The Context
The pause on federal student loan payments, interest, and collections provided relief to millions of borrowers for over five years. However, with the pause now lifting, the focus is shifting to the roughly 5 million borrowers currently in default and another 4 million in late-stage delinquency. These borrowers face renewed collection efforts, including:
- Treasury Offset Program (TOP): Starting May 5, 2025, the government can withhold tax refunds, federal salaries, and portions of federal benefits like Social Security to recover defaulted loan amounts.
- Wage Garnishment: Notices for wage garnishment are expected to roll out later in the summer, allowing up to 15% of a borrower’s disposable income to be redirected toward loan repayment.
- Administrative Actions: Additional measures, such as reporting to credit bureaus and restricting access to further federal aid, will intensify pressure on borrowers to address defaulted loans.
What’s Driving the Change?
The resumption of collections reflects a broader push to normalize federal student loan operations after an extended period of forbearance. The Department of Education has been preparing borrowers through email campaigns from the Office of Federal Student Aid (FSA), urging them to check their loan status on StudentAid.gov and explore options like income-driven repayment plans or loan rehabilitation to avoid involuntary collections. Despite these efforts, many borrowers remain unprepared, which is likely to result in a surge of collection activity.
Implications for the Collections Industry
For businesses in the collections space, particularly those serving B2B clients like financial institutions, loan servicers, or third-party agencies, this restart signals a significant uptick in demand for services. Key areas of focus include:
- Increased Call Volumes: As borrowers receive collection notices, contact centers can expect higher inbound and outbound call traffic. Accurate caller identification and efficient call handling will be critical to managing this surge.
- Borrower Outreach: Agencies will need to prioritize clear, compliant communication to guide borrowers toward resolution options, such as rehabilitation or consolidation, while adhering to regulations like the Fair Debt Collection Practices Act (FDCPA).
- Data and Analytics: With millions of accounts entering active collections, businesses will rely on robust data management to prioritize high-risk accounts, verify borrower information, and streamline recovery efforts.
What Does This Mean for the ARM/Collections World?
- Surge in Activity: The accounts receivable management (ARM) and collections industry will see a dramatic increase in workload as millions of defaulted and delinquent accounts become active targets for recovery.
- Operational Strain: Contact centers and agencies will need to scale staffing, technology, and processes to handle higher call volumes and borrower inquiries.
- Compliance Focus: Navigating FDCPA and other regulations will be critical as agencies ramp up outreach while maintaining borrower trust and legal adherence.
- Technology Demand: Robust caller ID, CRM systems, and data analytics tools will be essential to manage the influx of accounts and optimize recovery strategies.
- Borrower Complexity: Many borrowers may be unaware of or unprepared for collections, requiring agencies to balance assertive recovery with clear communication about repayment options.
This restart is poised to make the ARM and collections landscape busier and more dynamic than it’s been in years, setting the stage for an intense and challenging period ahead.
