The Hiatus Ends: Back to Repayment Starting May 5
Imagine you’re Taylor, a freelance designer from Virginia who—like millions of others—hasn’t made a student loan payment since March 2020. It wasn’t avoidance. It was relief, courtesy of a federal pause initiated during the pandemic. But now, that pause is over.
As of May 5, the U.S. Department of Education will resume collections on defaulted federal student loans. For over three years, borrowers like Taylor were shielded from wage garnishments, collection calls, and tax refund seizures. But the shield is coming down, and it’s time to understand the implications—especially for your finances and your taxes.
The Debt Landscape: A Balloon That’s About to Pop?
Let’s talk numbers: as of now, over 42.7 million Americans owe a collective $1.6 trillion in federal student loans. Over 5 million of those borrowers are in default—meaning they haven’t made a payment in over 360 days. Some have been delinquent for more than seven years.
That’s not just a financial issue; it’s a national liability. A quarter of the loan portfolio could soon be classified as defaulted debt.
The Collection Comeback: How Uncle Sam Is Getting His Money Back
With the resumption of collections, the federal government is bringing out its toolbox—and it’s not pretty.
- Treasury Offset Program: Expect tax refunds and federal benefits to be intercepted.
- Administrative Wage Garnishment (AWG): Employers could be instructed to withhold up to 15% of a borrower’s disposable income.
While these actions may feel harsh, the Department of Education insists they are necessary to enforce financial accountability and protect taxpayers.
But there’s a soft side too. The Office of Federal Student Aid (FSA) is rolling out a borrower engagement blitz.
Borrower Support: From Confusion to Clarity
To ease borrowers back into the rhythm of repayment, the Department is offering a suite of support tools:
- Income-Driven Repayment (IDR) Enhancements: Enrollment will be more streamlined, eliminating the need for annual income recertification.
- Loan Simulator Tool: Helps borrowers like Taylor explore repayment options that match their income and goals.
- AI Assistant “Aiden”: A virtual guide for navigating your loan situation.
- Strategic Partnerships: Schools, states, and community organizations will help amplify outreach and education.
The goal? Avoid a repayment cliff by educating and equipping borrowers before collections go full throttle.
What This Means for You—Especially at Tax Time
If you’ve been ignoring your loans, this part might hit home. Collections resuming means your tax refund is now fair game.
Here’s the kicker: you might still be eligible for a tax deduction—yes, even if you didn’t get a Form 1098-E.
Let’s break it down:
- Student Loan Interest Deduction: This “above-the-line” deduction allows you to reduce your taxable income by up to $2,500 for interest paid on qualified student loans—even if you don’t itemize deductions.
- Who Qualifies?
- For single filers: Modified AGI must be under $85,000 (phaseout ends at $100,000).
- For joint filers: Phaseout starts at $170,000 and ends at $200,000.
- Not available for “married filing separately.”
Even if your loan servicer didn’t send a Form 1098-E (typically issued only if you paid $600+ in interest), you can still claim the deduction if you have proof of interest paid.
Strategy Tip from a CPA’s Desk
Let’s go back to Taylor. They paid $400 in loan interest last year. No 1098-E arrived, but their online loan statement shows monthly interest payments.
Guess what? Taylor can deduct that interest. And if they’re in the 22% tax bracket, that’s nearly $90 in savings—just for keeping receipts.
So whether you’re a freelancer in Fairfax, a government contractor in McLean, or a healthcare provider in Alexandria, this is your moment to revisit your loan statements—and potentially lower your tax bill.
Why This Matters for High-Earning Professionals
If you’re a high-net-worth individual or a business owner, you might think student loan news doesn’t affect you anymore. But here’s a smart angle: helping employees navigate this restart could boost retention.
Offering loan repayment assistance as a fringe benefit isn’t just kind—it’s strategic. Under current IRS rules, employers can contribute up to $5,250 annually per employee toward student loan repayment tax-free through 2025. That’s a win-win for attracting and keeping top talent.
The Bigger Picture: Financial Order vs. Financial Strain
The return of collections is about more than numbers. It’s about rebuilding a system where borrowers fulfill their obligations—but with grace and guidance.
The Department of Education’s dual approach—strict enforcement paired with support—reflects a shift in strategy. It’s not just about collecting debt. It’s about preventing another economic slide caused by financial fragility.
Final Thoughts: Get Ahead of the Game
Here’s what to do next:
- Check Your Loan Status: Log into your FSA account or contact your loan servicer.
- Explore IDR Plans: You may qualify for reduced payments based on your income.
- Review Your 2024 Tax Return: Look for deductible interest—even if it’s under $600.
- Talk to a Tax Pro: Don’t leave money on the table due to assumptions or guesswork.
And if you’re overwhelmed or unsure? Let JS Morlu help. We’re not just about balance sheets—we’re about peace of mind. Our CPA team specializes in turning financial uncertainty into clarity and control.
Need help with your student loan interest deduction or tax planning? Contact JS Morlu today for a free consultation and let us help you make smart, strategic decisions for your financial future.