Resumption of Loan Recovery Procedures for Delinquent Student Borrowers: Implications for Affected Individuals
When Student Loans Go Back in the Red: What You Need to Know
Get ready, folks! Starting Monday, the Department of Education is kicking off collections on loans in default, potentially leaving millions of borrowers vulnerable to having their benefits and wages garnished.
This move comes as the Trump administration continues its mission to dismantle the Education Department and roll back President Joe Biden's policies, including those related to student loan forgiveness.
The crackdown is set to affect over 5 million borrowers currently in default. And the bad news doesn't stop there: there are an estimated 4 million additional borrowers in "late-stage delinquency," which means they've missed payments for more than 90 days.
So, what does it mean if your student loan slips into default? Here's what you need to know:
Debt Delinquency 101
Federal student loans enter default status after 270 days of non-payment. But don't worry, if you're not in default, these collection efforts won't impact you.
Check Your Loan Status
When a loan goes into default, it's reflected on your credit report. Make sure to check your loan status regularly and stay informed about options available to you. Even if you know your loans aren't in default, it's a good idea to stay on top of things.
Brace Yourself for Wage and Benefit Garnishment
To collect on these debts, the government is restarting the Treasury Offset Program, which garnishes federal and state payments such as tax returns or social security benefits. If you're in default, be prepared for this. The Education Department also plans to reinstate administrative wage garnishment this summer, allowing them to order non-federal employers to withhold a portion of your income to pay off the loans in default.
Exit Default: Rehabilitate or Consolidate Your Loans
The Education Department is urging borrowers in default to contact the Default Resolution Group and work out a payment plan. You can rehabilitate your defaulted loans by making nine monthly payments over a 10-month period. Or, you might choose to consolidate multiple loans into one with a single payment, but keep in mind that you'll be on the hook for any future interest on the higher balance.
Loan Rehabilitation
To rehabilitate a defaulted loan, first reach out to your loan servicer and agree in writing to make the payments. The amount you'll pay depends on your income, and you'll need to provide documentation to prove it. After making nine consecutive payments, your loan will no longer be in default status, and the default notice will be removed from your credit report—but any past delinquencies will still show up.
Loan Consolidation
Consolidating your loans allows you to combine several federal student loans into one loan with a single monthly payment and no application fee. However, you'll need to pay any future interest on the higher balance and might end up paying more overall. You can also switch to a different loan servicer if you consolidate your loans.
Additional Relief While in Default
If you go into default, you can no longer receive deferment or forbearance, which allow you to temporarily stop making payments on your loan. You'll also lose the ability to choose a repayment plan. But, once you've completed loan rehabilitation, consolidated your loans, or paid off your debt in full, you'll regain access to deferment, forbearance, and income-driven repayment plans.
Bankruptcy as a Last Resort
If you can't pay your student loans and other debts, you might consider filing for bankruptcy. Unlike other consumer loans, student loans can only be discharged under specific criteria. You'll need to demonstrate undue hardship to qualify, but the Biden administration has made it easier for some borrowers to do so.
Avoid Scams
While the Education Department announced collections would resume last month, scammers often use such announcements to trick vulnerable borrowers into paying for false promises of debt relief or more affordable payment plans. Always remember, there's never a fee to access rehabilitation or consolidation, and paying someone a fee won't speed up the process or get you a better deal than doing it yourself.
Stay informed and protect yourself from scams by reading more about avoiding student loan-related scams on the student aid office's website. Good luck, borrowers!
- The government's resumption of collections on loans in default, starting from Monday, could potentially impact the personal-finance of millions of borrowers, as it may lead to wage and benefit garnishment and the reinstatement of administrative wage garnishment.
- To alleviate the financial consequences of default, borrowers are urged to consider rehabilitating or consolidating their loans, which can help them regain access to deferment, forbearance, and income-driven repayment plans, thus preventing further financial strain in their personal-finance.
