The Education Department is sending borrowers in default a series of email communications about their options. They encourage borrowers to make a monthly payment or enrol in an income-driven repayment plan.
But if you’re in default, the government can garnish your wages, tax refunds and Social Security benefits. You can stop wage garnishment by proving significant financial hardship, experts say.
1. Negotiate With Your Creditor
If you can get your lender to agree on a payment plan, it may stop the garnishment action. This can be achieved by simply contacting your loan servicer and requesting an affordable repayment option. If you can make a payment on your debt, it will prevent any negative marks from being added to your credit report and may allow you to refinance or obtain additional loans in the future.
If your loan has already gone into default, it is possible to get out of the situation by enrolling in a deferment or forbearance. It is also worth looking into income-driven repayment plans.
The federal government and loan guarantee agencies can garnish wages administratively. However, borrowers must be notified that wage garnishment is about to begin, and they have the right to request a hearing before it occurs. They should also request a copy of the original promissory note and any supporting documentation that verifies the amount owed, as errors can often occur in these records.
Private lenders are not allowed to garnish tax refunds or Social Security payments, but they can take you to court if you don’t pay the debt. Private debt collectors usually attempt to negotiate a repayment agreement before taking legal action. The record of a student loan default and any late payments that preceded it will remain on your credit report for seven years, so it’s best to try to avoid this outcome as much as possible.
2. Enrol in a Loan Rehabilitation Program
The federal government can garnish your wages, tax refunds and Social Security benefits if you default on your student loans. You can avoid this by getting into a loan rehabilitation program or loan consolidation.
A loan rehabilitation program is a nine-month payment plan that allows you to rehabilitate your loan by making on-time payments. During the process, your loan servicer will determine an affordable monthly payment amount based on the income documentation you provide. The program also stops wage garnishment, halts tax refund offset and reactivates your ability to apply for income-based repayment plans.
You can enrol in a loan rehabilitation program by completing a reform provided by your loan servicer. You will need to provide income documentation, including a current billing statement (dated within the last few days) and copies of your two most recent pay stubs. You will also need to sign a loan rehabilitation agreement.
If you are unable to afford the initial loan rehabilitation payment, ask your servicer about a financial hardship option that takes into account your expenses. Once you make your ninth on-time payment, the default status on your loan will be removed. Please note that if you fail to complete the rehabilitation process, any existing garnishments will resume; they can only be stopped once. You may lose your financial aid eligibility.
3. Consolidate Your Loans
The Education Department is attempting to reduce the number of borrowers in default by offering loan rehabilitation and consolidation programs, as well as making it easier for borrowers to enrol in income-driven repayment plans. This effort includes a major public information campaign and increasing the number of loan servicer reps available during evenings and weekends.
If your loans have been transferred to a collection agency or a guaranty agency, you can request a hearing with the agency within 30 days of receiving notice. You should request proof that the debt is yours and that you owe the amount stated on the notice. Borrowers are also advised to demand a copy of the original promissory note to see exactly what is owed and who is responsible for paying it. If you are having difficulty working with a collection agency, many organisations provide help navigating this process for free or for a fee.
Federal borrowers may also choose to consolidate their loans through the Direct Consolidation program. However, borrowers should consider carefully whether this is the best option for them. Consolidation involves combining multiple loans into a single, new loan with one interest rate and repayment term. Any unpaid interest on individual loans will be added to the principal of the consolidated loan, increasing your balance and requiring you to pay more in interest. Additionally, borrowers who consolidate with private lenders forfeit the benefits of federal student loan protections, such as deferment and forbearance.
4. File for Bankruptcy
Before a creditor can garnish your wages, it must first receive a money judgment against you from the court. This happens after the creditor wins a lawsuit against you or wins a settlement agreement with you. Creditors can then use that judgment to get an order from the sheriff or marshal, who sends it to your employer. The garnishment order instructs your employer to withhold a percentage of your take-home pay with each paycheck and then send it to the creditor.
Federal loan borrowers have some protection against wage garnishment. Your debt collector must wait 30 days after sending you a notice before initiating wage garnishment. This provides an opportunity to negotiate a payment plan or make a payment to prevent the garnishment. The collection agency must also receive your first garnishment payment within the 30-day window to stop the process.
The government will only garnish up to 15% of your disposable income, which is the amount left over after your legally required deductions are taken from each paycheck. This includes expenses such as rent and utilities. In addition, you cannot be fired for having your wages garnished by the federal government for student loan debt.
If you’re facing student loan garnishment, it’s crucial to take action to avoid default before it’s too late. Contact your loan servicer immediately to explore options for bringing your payments up to date, such as refinancing your loans or enrolling in an income-driven repayment plan. You may also qualify for deferments or forbearance, which temporarily suspend your payment
