Student loan debt collection to resume in May. What Long Islanders should know.

Long Island's economy could be hit particularly hard by the Trump administration's decision to soon begin collection on student loans that are in default, local economists said. 

Starting May 5, the Education Department will begin involuntary collection through the Treasury Department’s offset program, which withholds government payments, the DOE said in late April. Tax refunds, federal salaries and other benefits could be withheld from borrowers with past-due debts.

After a 30-day notice, the department will begin garnishing wages for borrowers in default. Loan holders who don't make payments for nine months go into default, which is reported on credit scores, according to the Federal Student Aid office.

John Rizzo, former chief economist for the Long Island Association business group and professor of public health economics at Stony Brook University, said the Island's higher proportion of college degree holders means the region has a higher share of student debt holders than other parts of the country. Given increased fears of a possible recession and global economic uncertainty considering the U.S.’ ongoing trade war with China, resuming collections now will likely hurt the economy further. 

“We have enough challenges we’re dealing with the economy to add this to the list,” Rizzo said. “It’s just not the right time.”

Approximately 1.3 million Long Islanders have a bachelor's degree or higher, according to census data.

Starting in March 2020, the federal government suspended payments and interest accumulation for federal student loans, causing the delinquency rate to fall below 1% by November 2022, according to the bank.

Payments resumed in October 2023, with an on-ramp protecting student borrowers from negative credit reporting until September 2024. It takes at least 90 days of missed payments to be considered delinquent, which means adverse credit reporting is only now appearing for some, the New York Fed said. Federal student loans have not been sent to collections since March 2020, when President Donald Trump paused loan payments and interest accrual.

Here are three things to know about collections on student loans in default:

How easy is it for the government to garnish my wages over student loan debt?

Legal experts on Long Island said it’s important to know that as a loan provider, the federal government has powers not available to traditional creditors.

“The federal government has collection options that are not available to private creditors,” Vivian Storm, supervising attorney for Legal Services of Long Island, said last month in an email. The nonprofit provides free legal assistance for those navigating student debt.

“The federal government does not need to bring a court case or obtain a money judgment before garnishing wages or Social Security benefits or seizing tax refunds,” Storm said.

There are no “statute of limitations on federal student loan debt,” she added.

How would student loan collections impact the Long Island economy?

Mariano Torras, an economics professor at Adelphi University, said resumption of mandatory collections starting May 5 will affect the local economy and likely lead to lower consumer spending.

“While it’s really impossible to know the exact outcome, there is no doubt it will have an economic impact,” said Torras, who is also chair of Adelphi's Finance and Economics department.

One area of concern, he said, is that defaulted student loans can reflect negatively on credit scores, making it harder for debt holders to make big ticket purchases.

Torras said while many in default might “make it work out of fear of their credit scores going down,” those same borrowers will likely limit purchases that stimulate the economy. “They will be spending less money,” he said.

While debates over student loan forgiveness are still top of mind for many, the timing of the collection news is "terrible" in light of the country's economic outlook, Rizzo said.

Given concerns of rising prices on consumer goods and global fears of a tariff-induced recession, Rizzo said many Long Islanders, especially those earlier in their careers, are already facing financial headwinds.

“Whether or not you think people who are delinquent on loans should be sent to collections, this is a very bad time to do it,” Rizzo said.

What can borrowers in default do?

Unfortunately, there is no easy fix for borrowers whose loans have defaulted, Storm said.

With the status of initiatives like the Saving on Valuable Education (SAVE) plan, an income-based repayment plan introduced in 2023 designed to lower monthly payments and interest growth, being blocked in the courts, “borrowers do not have a clear path to get out of default,” Storm said.

In February, the 8th U.S. Circuit Court of Appeals ruled against the SAVE plan following lawsuits from multiple Republican-led states.

“The best option for many borrowers to get out of default is to apply for consolidation and ask to be placed in an income drive repayment plan,” she said.

Storm said the applications will not be processed until May 10. "At that time, I expect that there will be such an enormous backlog that it may be many months before new applications are resolved.”

With options for student loan borrowers “changing from day to day,” Storm said those with concerns about their loans should reach out to organizations like Legal Services of Long Island.