We’re navigating both a tricky student loan repayment and a general economic landscape. New updates are always surfacing, but recently, the federal student loan repayment pause ended, and borrowers who are unable or haven’t resumed making payments may have the funds involuntarily collected. If you’re at risk of having wages and other benefits garnished for student debt, you do have options. Here’s everything to know.
Borrowers are facing involuntary student loan repayments
Beginning May 5, the Department of Education began collections on any student loans in default. As part of the Treasury Offset Program, the government may withhold tax refunds, Social Security benefits and federal salaries from those with defaulted loans.
Not sure whether you’ll be affected? According to the Federal Student Aid website, missing a required payment (even if it’s only by one day past due), your loan is classified as delinquent.
If your loan continues to be delinquent, the loan is at risk of entering default, but the exact timeline depends on the type of loan you received. For a loan in the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program, you’re considered to be in default if you don’t make your scheduled student loan payments for at least 270 days. For a loan made under the Federal Perkins Loan Program, the loan holder may place the loan in default if you don’t make your scheduled payment by the due date.
A required 30-day notice will be sent out to everyone impacted, and collections will reportedly begin later this summer.
What may happen if your loans are in default?
Defaulting on a student loan can lead to various legal and financial issues, including:
- The entire unpaid balance of your loan and any interest you owe becomes immediately due.
- Your tax refunds and federal benefit payments may be withheld and applied toward repayment of your defaulted loan.
- Your wages may be garnished, meaning your employer might be required to withhold a portion of your pay and send it to your loan holder as repayment.
- You won’t be able to receive deferment or forbearance, and you lose eligibility for other benefits, such as the ability to choose a repayment plan.
- You lose eligibility for other federal student aid including Pell Grants and student loans.
- The default is reported to credit bureaus (consumer reporting agencies), which can significantly drop your credit rating.
- You may not be able to purchase or sell assets like real estate.
- Your loan holder can take you to court.
- You may have to cover court costs, collection and attorney’s fees and other costs associated with the collection process.
- Your school may withhold your official transcript.
What you can do if you are at risk of default
The quickest and most effective way to avoid and get out of default is to repay the loan in full. However, that may not be a feasible option for everyone. If you’re unable to do this and are struggling to make your monthly payments, you can contact your loan servicer to go over your options. Here are a few paths you may take:
Switch repayment plans
You may be eligible for a lower monthly payment. You can once again apply for an income-driven repayment plan, where your monthly payments are based on how much money you make and your family size.
IDR plan varieties include the Income-Based Repayment (IBR) Plan; Income-Contingent Repayment (ICR) Plan; Pay As You Earn (PAYE) Repayment Plan; Saving on a Valuable Education (SAVE) Plan.
After satisfying a certain number of months of qualifying payments on an IDR plan, you can get the remaining balance of your loan(s) forgiven.
If you have multiple federal student loans, you can consolidate them into a single Direct Consolidation Loan, which could make you eligible for more helpful repayment plans. (Make sure to learn about the advantages and possible drawbacks of loan consolidation first).
Get a deferment or forbearance
You can also consider temporary relief with deferment or forbearance. If you’re eligible for either of these, you can temporarily suspend your loan payments.
There are key considerations here. You will generally be charged interest during your period of deferment or forbearance, so your balance will increase and you’ll pay more over the full life of your loan.
Additionally, if you’re pursuing loan forgiveness, any period of deferment or forbearance may not count toward your requirements. In this case, your progress toward forgiveness will pause until you begin payment again.
Important to note: During a deferment, there are some types of loans that don’t accrue interest, but with a forbearance, interest accrues regardless of loan type.
Eligibility requirements vary, but you may be entitled to forbearance if you are:
- Experiencing financial difficulties, such as medical expenses or changes in income
- Serving in AmeriCorps
- Performing service that would qualify you for partial loan forgiveness through the U.S. Department of Defense
- Working in a medical or dental internship or residency
- Serving in the National Guard
- Have student loan payments that are high in relation to your income
- Working as a teacher to qualify for Teacher Loan Forgiveness
You might be able to get a student loan deferment if you are:
- Undergoing cancer treatment
- Experiencing economic hardship
- In a graduate fellowship program
- Enrolled in school at least half-time
- Performing qualifying military service
- A post-active duty service member
- A Parent PLUS borrower with a student enrolled in school
- Enrolled in a rehabilitation training program
- Unemployed