Student Loan Default
One of the biggest issues with student loan default is the fact that the Department of Education typically places a wage garnishment order on you for the length of time it takes for you to finally pay the loans off.
What is a wage garnishment? Basically, it is a deduction that goes directly off your paycheck. Your employer is required to withhold it from you. A garnishment order can be as high as 15% of your paycheck. Once an active wage garnishment order has been put on your account, your options shrink and become extremely limited.
For example, you are no longer able to consolidate in order to get out of debt, and your lender will not lift the garnishment unless you enter into a rehabilitation program and begin to make satisfactory payments. At this point, you will be back in good standing.
If you have a wage garnishment, the Department of Education will also do one more thing—they will contact the IRS, who will offset any tax refund you may have by applying it to your loans.
This means that any tax refund you would normally receive would be added onto your student loans instead. It is also worth noting that the IRS can and will apply your spouse’s tax refund to your loans as well, if you are married and filing for taxes together. This can occur even if your spouse does not have student loans of their own and did not co-sign on the loans.
Getting Out of Student Loan Default Through Rehabilitation
Getting your loans out of student loan default as soon as possible is the best way to get back in good standing with your lender and the IRS. However, the borrower must be proactive and take action in order to make this become a reality.
One option that’s available to borrowers in default is a rehabilitation program. This is a nine-month program where the borrower makes agreed upon payments with the lender. After all nine successfully payments, the loans will no longer have default status. If the borrower fails to make even one single payment, the rehabilitation must be restarted.
Loan rehabilitation has pros and cons, and borrowers are advised to do their research on the negative and positive aspects of this option before they commit to the rehabilitation program.
There is another option available to you if you find yourself in student loan default. You can consolidate your loan into the William D. Ford Direct Loan program.
In this case, your defaulted loans will all be paid off and consolidated into one new loan. In many cases, this means that you will be placed with a new servicing institution, and several different things will happen–you will have one brand new loan, you’ll be in good standing, and you’ll have a weighted average interest rate of your old loans. This is very beneficial to many borrowers who have fallen into default.
If you consolidate, you are able to choose from a selection of repayment plan options. Some of these offer you payments that are as low as $0.00 per month—this is not a deferment or forbearance, which simply pauses the loan, but a legitimate payment. In many cases, if people are not making significant enough incomes, they can have $0.00 monthly payments for years, and after 20-25 years the remaining balance will be forgiven.
In addition to this very obvious benefit, there are other student loan forgiveness benefits as well. However, keep in mind that, much like the rehabilitation program, there are several positives and negatives related to the consolidation program. The borrower should make an educated and informed decision before moving forward with consolidation, as it may not be the very best option for them personally.