The landscape of federal student loan compromises is evolving in 2026. With collections on defaulted loans restarting and pausing intermittently, borrowers need to stay informed about their options. The U.S. Department of Education does not have the authority to forgive all student loans through executive action, but it can compromise federal student debt on a case-by-case basis. This article delves into the specifics of these compromises, suspensions, and terminations of collection activities.
In May 2026, collections on defaulted loans resumed after a five-year pandemic pause. However, the Department of Education hit pause again in January 2026, postponing wage garnishment and Treasury offsets while rolling out a repayment overhaul set to take effect on July 1, 2026. With roughly 9 million borrowers now in default, understanding when and whether the government will settle a balance is more relevant than ever.
The U.S. Department of Education’s Authority to Compromise Federal Student Debt
The U.S. Department of Education can settle long-defaulted federal student loans at a discount. The three standard settlement offers include:
- A waiver of collection charges
- A waiver of half of the interest that has accrued since the loan went into default
- Reducing the outstanding loan balance by 10%
These settlements must be paid in a lump sum by the end of the year. They generally exceed the amounts the U.S. Department of Education could collect through wage garnishment and the offset of income tax refunds and Social Security benefit payments.
Legal and Regulatory Framework for Compromising Federal Student Debt
The legal authority for federal agencies to compromise debt owed to the federal government is outlined in the Money and Finance section of the U.S. Code, enacted in 1982. This authority is most often exercised with regard to defaulted federal student loans and bankruptcy discharge of student loans. Federal agencies are required to take all appropriate steps to collect any delinquent debt before discharging it.
According to 31 USC 3711(a)(2), federal agencies may compromise claims of up to $100,000 (not including interest) under two circumstances:
- It appears that no person liable on the claim has the present or prospective ability to pay a significant amount of the claim, or
- The cost of collecting the claim is likely to be more than the amount recovered.
The regulations at 31 CFR 902.1 specify that the authority to compromise debts of $100,000 or less rests with the federal agency, while the authority to compromise debts greater than $100,000 rests with the U.S. Department of Justice.
Determining When a Borrower is Unable to Repay a Debt
When determining whether a borrower is unable to repay the debt, federal agencies consider the borrower’s age and health, present and potential income, inheritance prospects, and the possibility of concealed or improperly transferred assets. This information should be verified using credit reports and other financial information.
Assessing the Cost of Collection
Guaranty agencies can decide against opposing an undue hardship petition on a FFELP loan when the expected cost of opposing the discharge petition would exceed one-third of the total amount owed on the loan. Similar rules apply to the Federal Perkins Loan program and the Direct Loan program, although there are no regulations that require the U.S. Department of Education to follow this process.
In practice, the one-third calculation does not seem to occur. The cost of litigation often exceeds a third of the average student loan debt that borrowers seek to discharge through an undue hardship petition. The federal government may continue to collect a debt, even if the cost of collection exceeds the potential recoveries, to demonstrate its willingness to pursue aggressively defaulting and uncooperative debtors as a deterrent to default by other borrowers.
Determining the Amount of Student Loan Compromise
Compromises must bear a reasonable relation to the amount that can be recovered by enforced collection procedures. The amount accepted in compromise may reflect an appropriate discount for the administrative and litigative costs of collection. When there is significant doubt about the federal government’s ability to prove its case in court, the amount accepted in compromise should fairly reflect the probabilities of successful prosecution to judgment. Court costs and attorney fees should also be considered.
Generally, compromises must be paid in a lump sum and not in installments. Discharged debts must be reported by the federal agency to the IRS. And when a debt is discharged, the federal agency must release any liens that secure the debt.
Suspension and Termination of Collection Activities
Federal agencies may suspend collection of a debt when the agency cannot locate the borrower or the borrower’s financial situation is expected to improve. Federal agencies may terminate collection of a debt when the agency cannot locate the borrower, is unable to collect any substantial amount owed, the costs of collection are expected to exceed the potential recoveries, the debt is legally without merit, enforcement of the debt is time-barred by a statute of limitations, the debt cannot be substantiated, or the debt has been discharged in bankruptcy.
It’s important to understand that even after collection termination, the federal agency might pursue collection activity in the future if the borrower’s financial circumstances change, a new collection tool becomes available, or it’s able to offset income or assets that weren’t previously available. This means that there’s little practical difference between the suspension and termination of collection activity.
Federal agencies may choose to sell the debt if the sale is in the best interest of the United States. But the U.S. Department of Education must first have satisfied the requirements listed above to terminate collection activity.
For most borrowers, a settlement isn’t the first move. Pursuing a compromise can make sense if you truly can’t repay based on your finances, or if the government’s cost to collect would be very high—and if you have a lump sum to offer. Otherwise, the 2026 options may serve you better:
- Loan rehabilitation gets a defaulted loan back into good standing, and OBBBA now allows a second rehabilitation if you’ve used one before.
- The Repayment Assistance Plan (RAP) and the remaining repayment plans launching July 1, 2026 can lower payments without a lump-sum payoff.
- Making even a single payment pulls a loan out of default and resets the 270-day clock.
