As the COVID-19 fades into the past, hundreds of thousands of federal student loan borrowers are bracing themselves for fresh battles: the resumption of wage garnishment and collection actions. It is, therefore, very important to understand the consequences of loan defaults and possible financial repercussions at this point when temporary relief has expired.
The lifting of the moratorium on payments
The COVID-19 pandemic heralded a record payment pause for federal student loans lasting until September 2023 as detailed with this article, Temporary student loan relief as three-month pause granted on collections. For the first time, the pause brought long-awaited relief to the borrowers from payments and collection efforts. Now that this period of grace is over, borrowers will begin to face stringent consequences of missed payments once again, in the nature of wage garnishment and adverse credit reporting.
According to higher education expert Mark Kantrowitz, borrowers can expect to receive multiple notifications before their accounts are classified as delinquent or defaulted, typically after 90 days of missed payments.
Legal consequences of defaulting Federal Student loans
Default occurs when a borrower stops making payments on their federal student loans for about nine months, 270 days. When a borrower defaults, a number of severe, adverse consequences may be imposed:
- Wage garnishment: Up to 15% of the borrower’s disposable income may be garnished by the federal government without needing any court order. This means, an employer must directly take out a portion of wage from paychecks.
- Tax refund offset: Federal income tax refunds are subject to withholding by the federal government to offset defaulted loan amounts.
- Impact on Social Security benefits: One might experience a reduction in social security benefits on account of loan defaults.
- Loss of Federal Aid Eligibility: Students experiencing defaults may not have any future eligibility for federal loans or grants, which may stand in the way of pursuing higher education.
- Credit score damage: When one defaults, credit scores are adversely affected, making it even harder to find apartments or other kinds of credit.
Options for avoiding default
For borrowers struggling with their federal student loans, several options can help prevent default:
- Deferment and forbearance: The borrower can request deferment or forbearance due to financial hardship. Deferment will allow the borrower to temporarily cease all payments without interest accrual, while forbearance allows the borrower to cease payments, but it will accrue interest. There are also programs to apply for if experiencing unemployment deferment or economic hardship deferment. To learn more on this, read this article, What does forbearance mean with Student Loans and how does it work?
- Income-Driven Repayment plans: Because these plans determine your monthly payments with respect to discretionary income, they also allow forgiveness after a certain period of time. This can even extend to qualified borrowers receiving $0 month-to-month payments if their incomes are low enough. To know more about the IDR plan, read this article, Is the Income-Driven Repayment (IDR) Plan adjustment still happening and when will it cease to be available?
- The Fresh Start Program: This is another initiative by the Biden Administration to assist borrowers who have defaulted on their loans. It seeks to support such borrowers in rehabilitating their loans and getting them on affordable options of repayment before collections actually start. It is a limited-time program and requires the borrower to take some sort of action to enroll.
How wage garnishment works
If the borrower goes into default, he/she should be aware of the process that is wage garnishment:
Note: A borrower will be given 30-day notice by the U.S. Department of Education before initiating wage garnishment. The notice will include the amount owed, along with the process by which garnishment can be avoided.
- Hearing request: Borrowers can request a hearing over the garnishment within a period of 30 days starting from the date of notice. If successfully done, this might delay or lessen the amount of the said garnishment.
- Repayment options: Borrowers may avoid wage garnishment by being proactive in communicating with their loan servicers when discussing repayment options or other alternative arrangements before going into default.
This is a change for federal student loan borrowers, who have enjoyed a temporary reprieve during the pandemic. Those who feel overwhelmed by their student loans should start considering their options today and begin taking the first steps to prevent going into default.
Read more: Two student loan debt relief progams ending – find out if you’re affected
Read more: Bad news for Student Loans borrowers? Here’s what Trump’s victory means if you’re hoping for forgiveness in 2025
