Treasury opens a portal for 9.3 million defaulted student loan borrowers; employers handle the garnishments

The Treasury Department and the Department of Education on Wednesday launched a Defaulted Loans Support Center, an online portal on StudentAid.gov where borrowers in default can apply to rehabilitate or consolidate their federal student loans, make payments and track their applications. The Treasury release says the portal replaces processes that ran on mail and fax. Treasury Secretary Scott Bessent described the federal student loan portfolio as $1.7 trillion.

The need is large. About 9.3 million federal student loan borrowers were in default as of June 30, up from roughly 6.2 million at the same point in 2016, CNBC reported, citing Education Department data released this month. A loan counts as in default after at least 270 days without a scheduled payment.

The percentages without the base

Treasury's release says its partnership with the Education Department has produced a 69% increase in approved applications for loan rehabilitation, and that consolidations out of default rose 95% after a technical fix. Neither figure comes with a count or a starting point. A 95% rise on a small base can still leave the default total barely changed. The same release says more than 5 million borrowers have been in default for over six years and another 5 million went into default in less than a year.

So the number that will show whether this works is the next Education Department default count, not the growth rates in Wednesday's announcement. CNBC also noted that an archived 2016 Treasury blog post found the department collected at lower rates than private companies when it handled defaulted debt in the past.

Where business owners come in

Collection on federal debt does not only land on the borrower. It lands on payroll. Under Treasury's administrative wage garnishment rule, 31 CFR 285.11, an agency can send a withholding order straight to an employer, and the employer then deducts from each paycheck until told to stop. The amount is the lesser of the order, up to 15% of the worker's disposable pay, or the amount by which disposable pay exceeds 30 times the minimum wage.

In dollars: a worker taking home $800 a week in disposable pay could see up to $120 a week withheld, assuming the 15% limit is the lower of the two. At $3,000 a month, that is up to $450.

The rule puts obligations on the employer, too:

• No retaliation. An employer may not fire, refuse to hire or discipline someone because a withholding order arrived.
• Liability for missed withholding. The agency can sue an employer for any amount it failed to withhold as ordered.
• A carve-out for new hires. Wages cannot be garnished from someone the agency knows was involuntarily separated from a job until they have been re-employed continuously for 12 months, and it is on the worker to tell the agency.

For a restaurant, a cleaning company or a construction crew running a weekly hourly payroll, that means a payroll change to process correctly, and an employee whose take-home pay just fell by up to 15%. An owner who gets one of these orders should give it to whoever runs payroll the same day, not let it sit.

What borrowers can do

The portal lists two routes out of default: rehabilitation, which involves an agreed series of payments, and consolidation into a new loan. Treasury says borrowers who consolidate can then get the temporary 1 percentage point interest rate cut by enrolling in autopay. We worked out what that cut is worth on $30,000 and $60,000 balances in this story. The portal is at studentaid.gov/default-support.

Sources: U.S. Department of the Treasury; CNBC; 31 CFR 285.11 via eCFR. Garnishment examples are Chronicle arithmetic. This is general information, not legal or financial advice.