Millions of Americans with defaulted student loans are facing a new phase of federal debt collection as major repayment changes take effect on 1 July 2026. While the government cannot erase all federal student debt through executive action, it does have limited authority to settle debts, pause collection efforts or end collection in specific circumstances.
The issue has become more significant as roughly 9 million borrowers remain in default and federal agencies prepare to move more accounts into a stricter collection system. For many borrowers, the question is no longer whether Washington can cancel their debt, but whether pursuing repayment is still practical, effective or financially worthwhile.
Settlement Rules
The Education Department can negotiate settlements on some defaulted federal student loans when officials determine that recovering the full amount may not be realistic.
A settlement can involve reduced payments, waived collection charges, partial interest reductions or acceptance of less than the full outstanding balance. These arrangements are designed to recover some money when full repayment is unlikely or when enforcement actions could cost more than the government ultimately collects.
The authority is separate from broader student loan forgiveness programmes. Instead, it comes from federal debt collection rules that allow agencies to compromise claims when borrowers cannot pay within a reasonable period, collection efforts are unlikely to recover the full amount or the cost of enforcement outweighs the expected return.
The Legal Limits
Federal regulations under 31 CFR Part 902 outline when agencies may compromise federal debts.
Under 31 USC 3711, agencies generally have authority to compromise claims up to $100,000, excluding interest. Larger claims are typically referred to the Department of Justice.
Before approving a settlement, officials are expected to review a borrower's financial circumstances, including income, expenses, assets, health, age, future earning potential and the possibility of recovering funds through enforcement.
The process relies on financial information such as credit reports and borrower statements covering assets and liabilities. In practice, settlement decisions are based on whether continued collection is likely to produce a meaningful recovery.
Why Collection Continues
The government can continue pursuing defaulted student loans even when recovery may appear uncertain.
Federal collection rules consider more than immediate financial returns. Agencies may also weigh the importance of maintaining repayment expectations and ensuring borrowers do not avoid obligations simply because collection is difficult.
White House press sec. Karoline Leavitt on defaulted student loan payments being sent to collections on May 5: “The government can and will collect defaulted federal student loan debt by withholding tax refunds, federal pensions and even their wages.” https://t.co/3ACerT0pQq pic.twitter.com/HQpAJNIO4v
— World News Tonight (@ABCWorldNews) April 22, 2025
That creates a balance between financial efficiency and enforcement. A case may still be pursued even when the expected recovery is limited if officials believe continued action is necessary to protect the wider loan system.
For borrowers, that means financial hardship alone does not automatically prevent collection activity.
When Debt Collection Ends
Federal agencies can suspend collection in certain situations, including when a borrower cannot be located or when officials believe the borrower's financial position may improve later.
Collection may also be terminated when the government cannot recover a substantial amount, further action would cost more than the likely return, the debt cannot be legally supported, the statute of limitations has expired or the obligation has already been discharged through bankruptcy.
However, ending active collection does not always permanently eliminate the debt. If a borrower's circumstances change or new collection options become available, agencies may be able to resume action.
The shift towards expanded Treasury collection efforts makes these rules increasingly important for borrowers already in default.
Options for Borrowers
For many borrowers, settlement is only one possible route. Loan rehabilitation can help borrowers return a defaulted loan to good standing by meeting required payment conditions. The new Repayment Assistance Plan, or RAP, is scheduled to launch on 1 July 2026, while other repayment options will remain available for eligible borrowers.
Taking action before collection escalates can also matter. Even a single qualifying payment may help remove a loan from default and restore access to repayment options.
For the millions affected by the upcoming changes, understanding the difference between forgiveness, settlement, suspension and continued collection may determine what choices remain available. The government's ability to compromise debt is limited, but for borrowers facing default, those rules could become increasingly important as the new collection system takes effect.
