Student loan borrowers who are in default on their payments could soon see money taken out of their paychecks, tax refunds or Social Security checks.

Wall Street

The US government is set to restart the collection of defaulted student loans, potentially impacting millions of borrowers. Those who have defaulted on loan payments, which occurs when payments are 270 days late, may face deductions from their paychecks, tax refunds, or Social Security benefits. This measure could affect between five and ten million borrowers, with up to 15 percent of disposable income involuntarily taken. This, in turn, could lead to a significant drop in credit scores, averaging a reduction of over 150 points.

Borrowers affected by this resumption are urged to explore alternatives like income-based repayment plans or loan rehabilitation, which can be explored further at StudentAid.gov. Meanwhile, Republicans in the US House of Representatives have proposed an overhaul of the student loan program, introducing borrowing caps and increasing requirements for the Pell Grant. They are considering caps of $50,000 for undergraduates and $100,000 for graduate students, with fewer repayment plans and hardship protections.

Efforts to address college costs continue to emerge. A bipartisan bill was introduced last year that proposed having tuition fees determined at the start of a degree program. This approach could help students plan more effectively by providing clarity on the financial commitment required for their education. The discussions aim to tackle financial challenges in higher education and support better planning for students and families.



Student loan default collection restarting

Sharon, this push is only going to affect those who have defaulted, right, on their loans. So how many people are we talking about and just how much money could essentially be taken? Well, we're talking about five million borrowers or up to 10 million if the numbers continue to grow of people who have defaulted. And that means you're late by 270 days on your payments. This impact could be significant for people. Some Fed data is saying that credit scores could drop by more than 150 points on average due to this. So, yeah, you're looking at that trickle down effect. Not only is that impact initially in terms of if it's coming from your paycheck or if it's coming out of your tax refund. Or Social Security retirement and disability benefits. So it's up to 15 percent of your disposable income that can involuntarily be taken from you. So it's really important to look at alternatives like income based repayment plans and loan rehabilitation. Go to StudentAid.gov, figure out what the alternatives may be for you. And my understanding is that Republicans in the House have released a plan to overhaul America's student loan program. What what are they proposing? They're looking at borrowing caps topping out at 50,000 for undergrads, 100,000 for graduate students. Also, fewer repayment plans and hardship protections for people and then increased requirements to receive that need based Pell Grant. OK, we'll be watching for that. And quickly, any effort now to tackle the cost of college itself? Well, there have been proposals out there. There was a bipartisan bill last year that was introduced that would look at actually having your income. Sorry, your graduate program or your undergraduate program, that degree program based on a guaranteed amount. So, you know, based on that degree program, how much you're going to pay going in up front. That could be key. That could be helpful for planning. All that uncertainty is so tricky. CNBC's Sharon Epperson, thank you. You can sign up for Sharon's newsletter, Money 101 at CNBC.com.

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