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FOR RELEASE January 13, 1995
Contact: Stephanie Babyak (202)401-2311 Jane Glickman (202) 401-1307
The Clinton administration has announced that borrowers will have a new opportunity to pay off defaulted student loans through monthly payments based on income -- or face having their wages garnished.
The U.S. Department of Education will continue in 1995 to collect loans of borrowers who are in default through IRS offset against borrowers' federal income tax refunds.
Under the new system, defaulters with loan balances still outstanding will be notified by mail that they can cure their default by negotiating a repayment plan based on income and outstanding balance.
This collection action has been highly successful over the past eight years, but collecting the entire loan by refund offset often took years. In addition, there were concerns that some defaulted borrowers became aware of the plan and rearranged their with holdings to avoid a tax refund.
Defaulters who fail to arrange a repayment plan with the Education Department may now have their wages garnished. Defaulted borrowers who receive garnishment notices have 30 days to object to the proposed garnishment.
"Some defaulters don't repay their loans because they can't afford the monthly payment," said U.S. Secretary of Education Richard W. Riley. "We now have options that enable responsible borrowers to make affordable payments. But those who refuse to pay face serious sanctions."
In addition to being subject to the threat of federal income tax refund offset and wage garnishment, defaulters are ineligible for further federal student aid (both loans and grants), have their default status reported to credit bureaus, and risk being denied credit cards or other loans. Defaulters who establish and honor a repayment plan can avoid offset of federal income tax refunds or earned income tax credits they qualify to receive.
Leo Kornfeld, senior advisor to the education secretary for direct lending, added, "I encourage individuals who may have defaulted loans to take advantage of this opportunity to repay their loans at an amount they can afford and get back into good standing," Kornfeld said.
Collection of student loans by offset (or withholding) of tax refunds began in 1986. Last year, the department collected $598 million through IRS withholding of federal income tax refunds from an estimated 780,000 taxpayers who were in default on a student loan.
In fiscal year 1994, defaulted student loans cost taxpayers some $2.4 billion. Default costs hit an all-time high of $3.6 billion in FY 1991, but have dropped steadily each year since through a combination of tougher sanctions against high-default schools and continued action against defaulters.
For further information about the new repayment provision, call the U.S. Education Department's Debt Collection Customer Service toll-free at 1-800-621-3115.