These changes mark the end of pandemic-era relief measures and could significantly affect millions of borrowers. With national student loan debt nearing $1.8 trillion, policy shifts like these are expected to reshape the landscape for repayment, default management, and financial planning among American households.
Wage Garnishment Resumes after Pandemic Pause
After a three-year suspension, the U.S. Department of Education will resume wage garnishment for borrowers in default beginning the week of January 7. According to The Washington Post, around 1,000 individuals will receive initial notices, with the rollout expanding to larger groups in the following months.
Borrowers are considered in default once they have gone approximately 270 days, about nine months, without making a required payment. When this status is triggered, the entire balance of the loan becomes immediately due, and the federal government is authorized to pursue collection through wage garnishment. Under the Higher Education Act, it can withhold up to 15 percent of a borrower’s take-home income.
Federal law requires a minimum of 30 days’ notice before garnishment begins. During this period, borrowers may request a hearing, pay off their debt in full, or seek alternative repayment plans. According to the Education Data Initiative, as of mid-2025, more than 5 million borrowers had not made a payment in over a year, placing them in default. An additional 4 million were in late-stage delinquency.
This enforcement shift follows the expiration of pandemic-related protections introduced under the Biden administration, which halted most collections and interest accrual from March 2020 through August 2023. Wage garnishment had been part of that freeze. The current move signals a return to pre-pandemic practices, with the Department of Education confirming its intent to steadily increase the number of borrowers receiving notices in early 2026.
Tax Exemption on Forgiven Debt to Expire
In a separate development, a temporary tax exemption on forgiven student debt is also ending. The American Rescue Plan of 2021 excluded most forgiven federal student loans from taxable income. That exemption will expire on December 31, 2025.
According to Education Data Initiative reporting, starting January 1, 2026, forgiveness granted through income-driven repayment plans will once again be considered taxable. This includes plans where borrowers make payments for 20 or 25 years, after which the remaining balance is canceled. With the exemption ending, any amount forgiven may be treated as income by the Internal Revenue Service.
The shift stems from the One Big Beautiful Bill Act, signed into law by President Donald Trump in July 2025. This legislation did not extend the exemption created under the earlier rescue package.
Some borrowers will still be eligible for tax-free forgiveness. According to the same source, the Public Service Loan Forgiveness program, available to qualifying nonprofit and government employees, remains unaffected. Targeted forgiveness initiatives for specific professions, such as teachers or disabled borrowers, also continue to offer relief without additional tax liabilities.
As repayment structures become more complex and burdensome for certain groups, the end of tax relief is likely to add a new financial challenge. The average federal student loan balance stands at $39,075, and even partial forgiveness could translate into a significant tax obligation for many households.
The simultaneous reinstatement of wage garnishment and rollback of tax benefits reflects a broader recalibration of federal student loan policy. As of the second quarter of 2025, federal student debt stood at $1.661 trillion. These upcoming changes will affect millions of borrowers navigating repayment in an evolving legal and financial environment.
