The Department of Education will resume federal student loan collections in May, garnishing income from borrowers with defaulted student loans. Also, it has reopened income-driven repayment (IDR) plan applications with one noticeable change and said that it would begin fully processing applications in May.
Additionally, the Department stated that spousal income would be taken into consideration when calculating monthly payments — even if the couple files their taxes separately. Within days, it reversed this stance on married borrowers.
While some student loan news continues to develop, other recent upheavals related to student loans may have already started impacting borrowers. A new report from FICO shows a drop in the average American’s credit score now that student loan delinquencies are once again reported to scoring agencies.
Three experts share their insight and tips for those affected by recent developments.
Government set to resume federal student loan collections as delinquencies drop average U.S. credit score
The Department of Education announced yesterday that it would restart federal student loan collections on May 5, 2025. That means, if you have federal student loans in default, the government can seize money from your wages and tax refunds. For seniors with student loan debt, the government can also take funds from your Social Security benefits.
The announcement comes just days after a new report from FICO showed that the first wave of student loan delinquencies dropped the national average FICO score one point — from 716 in January to 715 in February.
The month-over-month increase in the 30-plus day delinquency metric is being driven largely by missed student loan payments as opposed to delinquency on other credit products such as auto loans, credit cards and mortgages.
— Tommy Lee, senior director of analytics and scores at FICO
The percentage of the population more than 90 days past due in the last six months had a relative increase of 12 percent from January to February 2025, according to the report.
Student loan repayments resumed in 2023, after a three-year repayment pause due to the Covid-19 pandemic. However, students were given a one-year “grace-period” before late or missed payments were reported to the credit agencies, which would negatively impact credit scores. This on-ramp plan ended in October.
According to FICO, 2.7 million new student loan delinquencies were reported in February alone; 5.4 million more borrowers have not made a student loan payment since October 2024 and could add to the number of delinquencies soon. While 715 is still a healthy credit score, this average is likely to continue to drop as more delinquencies are reported.
What this means for borrowers
According to the ED announcement on collections resuming, “All borrowers in default will receive email communications from FSA over the next two weeks making them aware of these developments.”
The department will give these borrowers the opportunity to make a monthly payment, apply for an income-driven repayment plan or sign up for loan rehabilitation before the government begins wage garnishment this summer. It is important to note that this will only happen if you miss payment for 270 days. If you haven’t reached that threshold, you may still have time to avoid collections.
If you have federal student loans currently in default, contact the Default Resolution Group to find support.
Missed payments under 270 days also have their consequences, as we see in the recent FICO report. But Ted Rossman, Bankrate senior industry analyst, is more concerned with the impact these delinquencies are having at the household level.
According to a recent article by the Federal Reserve Bank of New York’s Liberty Street Economics, “a new student loan delinquency can reduce credit scores by more than 150 points.” For borrowers with high credit scores, the reduction could be as much as 171 points. Rossman notes that could drop someone’s excellent credit all the way to fair, or even poor, affecting one’s ability to get a mortgage, auto loan or other financing. And even if they do qualify, they likely won’t get one with favorable terms.
“To rebuild your credit, it’s important to fill your credit reports with as much positive information as possible,” says Rossman. He gives the following tips for doing so:
- Pay all loans on time and keep debts low.
- Add new accounts strategically, like becoming an authorized user on a good-credit borrower’s credit card.
- Sign up for a secured credit card.
- Consider alternative credit scoring programs, like Experian Boost and eCredible Lift.
- Consider a credit-builder loan.
For those who haven’t fallen into delinquency just yet, the best action to take for your credit score is to seek help to avoid it.
It’s better to speak up before you go delinquent. Perhaps the lender can offer a deferment or forbearance program, giving you permission to pay less or maybe even nothing at all for a time. You could also reach out to a reputable nonprofit credit counseling agency such as Money Management International or GreenPath for assistance.
— Ted Rossman, Bankrate senior industry analyst
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IDR applications reopen and partial processing resumes
In February, a federal court blocked the Saving on a Valuable Education (SAVE) plan and forgiveness under the Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE) plans. In response to the ruling, the Department of Education paused all IDR application processing and removed both paper and online applications from its website.
In a memorandum filed April 8 responding to lawsuit by the American Federation of Teachers, the department said processing is resuming for any borrowers who applied for the ICR, PAYE and income-based repayment (IBR) programs — not SAVE. Full IDR processing is expected to resume by May 10, 2025.
IDR applications are also available on StudentAid.gov, with one difference. The SAVE plan is no longer an option on applications. It is likely it won’t return.
What this means for borrowers
IDR application and processing are back just in time. According to leading student loan expert Mark Kantrowitz, borrowers currently enrolled in the SAVE plan will see their forbearance end within “a month or two” and will then need to choose a new plan.
The repayment plan with the lowest monthly payment is either PAYE or IBR. Borrowers who are ineligible for the PAYE repayment plan (usually because of when their loans were disbursed) should choose the IBR repayment plan.
— Mark Kantrowitz, student loan expert
Because SAVE had the lowest monthly payment of all IDR plans, borrowers should expect higher monthly payments on a new plan, he says. He points out that IBR and PAYE still offer $0 payments for those with incomes below 150 percent of the poverty line.
Whether SAVE enrollees should stay in their forbearance or change plans now depends on their financial situation and goals. Those seeking PSLF may want to change plans now so their payments can start counting toward forgiveness again. Those who aren’t pursuing PSLF or time-based forgiveness may want to stay in interest-free forbearance to help prepare for the financial changes that will come with changing plans. Kantrowitz recommends saving the amount of your loan payment to build up your emergency fund or using that money to ease into the higher monthly payments once they come.
Department of Education walks back plan to include spousal income for IDR even if couples file separately
In the same memorandum, the Department of Education stated it would be considering spousal income when calculating monthly payments under IDR plans — even for spouses who filed their taxes separately. This caused alarm for many married borrowers across the nation.
“Currently, married borrowers who file a separate federal income tax return have only their taxable income utilized in the calculation of their monthly payments,” notes Jay Fleischman, student loan attorney at Fleischman Consumer Law Center. “[If these borrowers] had their spousal income included, they would have seen their payments increase dramatically.” He also points out that some borrowers wouldn’t even qualify for an income driven repayment plan, making them ineligible for PSLF. This could also be detrimental for many of the four million borrowers who are currently enrolled in the SAVE plan and will need to switch to another IDR plan.
The panic was quickly snuffed when the Department corrected its memorandum. Married couples who filed separately would not have their spouse’s income considered. However, the department will count the spouse toward the family size, likely lowering the monthly payment.
What this means for borrowers
While this change was walked back, the changes are just starting for IDR plans and other student loan programs, such as federal direct PLUS loans.
“The Department of Education recently announced that they’re beginning negotiated rulemaking, which is the first step in overhauling their regulations,” says Fleischman. “There is a chance that income calculations or family size calculations may be on the agenda. I think it is something that we do need to keep our eyes out for.”
Fleischman also points out that we’re in the process of budget reconciliation, where Congress is looking at student loan repayment options, IDR plans and forgiveness in general. Borrowers should stay updated on both of these initiatives, remembering that there is a difference between headlines and action taken.
“We’re seeing requests in litigation,” he says. “We’re seeing proposals legislatively. We’re seeing a whole bunch of stuff that people think may potentially happen. And I think that it’s really important to recognize the difference between what we’re proposing and what we’ve implemented.”
For married borrowers wondering whether they should file separately or jointly in terms of how it will benefit their student loan payments, Fleischman says it depends.
“Married borrowers who file separately are going to perhaps have a lower income-driven repayment plan payment on their own,” he says, “but if both spouses have federal student loans, then it may be better for them to file jointly.”
However, Fleischman warns there are tax implications that come with either filing status, including missing out on certain deductions. “It’s really important to work very closely with a tax advisor to do a tax projection to be able to determine what your tax outcome is going to be prior to filing, so that you can line those numbers up with what your monthly payments are going to be under either scenario,” he recommends.
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