Student loan debt can be crippling. I know because there has been more than one period in my life where I have been financially unable to afford the payments on my student loans. When that happens, the smart thing to do is to ask for help with your student loan payments in the form of a financial hardship, deferment or forbearance. The non-smart thing is to just stop paying with no communication between you and the lender. When you do this, you are defaulting on those loans and that is a serious no-no.
Of course, sometimes you make less than wise financial decisions when it comes to your student loans, right? Not to worry – you’re not the only one to default on college loan debt.
What Happens When You Default On Your Student Loans?
Once you stop paying your student loans, you might think that you are free. You’re not sending them your money. And when you do that with the credit cards, it’s no big deal, right? Well, it is a seriously big deal with the student loan lenders. Primarily because the biggest lender of all is the Federal Government.
That’s right. With most of your student loans, you are giving Uncle Sam the finger when you just stop paying on them.
Unfortunately they will give that middle finger right back to you in the form of garnishing your wages.
That’s right – you will be forced to pay for those student loans one way or another.
In looking at the experience of other people who have defaulted on student loans, you can expect it to take around five years or so before it gets to the wage garnishment point. But before you reach that, you will have to deal with never-ending phone calls from all sorts of weird numbers. Those calls are them student loan people trying to reach you so that they can collect on this outstanding debt. They may even call your neighbors, your friends and your relatives, just like other debt collectors.
Here’s the dirty little secret about wage garnishment for defaulted student loans – 100% of the amount taken from your paycheck does NOT go toward your loans! In fact, only a portion of it does. First, money is taken to cover the collection efforts. Whatever is left over after that goes toward those outstanding student loans.
This means that it will take even longer to pay off the loans than if you were to negotiate a lower payment with them on your own!
Relief For Student Loans In Default
As you as you get word that your wages are being garnished (hopefully before this point actually), you need to take action to ensure that the majority of your payment is going toward college debt and not collection efforts.
Immediately contact your lender to see what your options are at this point.
You can rehabilitate your loans. This requires that you sign up for an income-based repayment system and make on-time payments for nine months. Once you successfully do this, the wage garnishment stops, the loans come out of default status and you can go back to receiving benefits of paying on-time (like rate reduction for auto-payments).
You can consolidate those outstanding college loans. In order to do this, you need do an income-based repayment plan and make two to four consecutive on-time payments.
Important things to note: with either of these options, you are on the hook for collection fees that can be as high as 18.5% of the total debt with the collection agency. This amount has to be paid when you bring the loans out of default. Yes, it can be a lot, but you are better off finding a way to make this work.
Additionally, the one-time payments that you must make to get out of default with the student loans is in addition to the wage garnishment amount. That’s right – you have to make the extra payments and keep having your wages garnished.
For more information on defaulted student loans, check out this official government website.