Solutions and Impacts You Need to Know

An involuntary collection refers to a creditor collecting owed funds by garnishing a borrower’s income. Because the Department of Education has resumed collections on defaulted student loans, federal student loan holders in default who don’t take action will soon be subject to involuntary collections. Outside of making sufficient payments to get your debt back in good standing, your options for avoiding wage garnishment include consolidating your loans and requesting a lower payment from your lender.

Understanding Involuntary Collections

The resumption of involuntary collections on defaulted student loans didn’t happen without warning. According to the U.S. Department of Education, by now, borrowers in default should have received emails alerting them of their loan status and suggesting repayment options. Notices will also be sent ahead of administrative wage garnishment, which can amount to up to 15% of your disposable pay.

While a wage garnishment is perhaps the most well-known result of defaulting on a federal student loan, there are several other potential consequences that borrowers may encounter, including:

• Loan acceleration: The entire outstanding balance of your loan, including whatever interest has accrued, immediately becomes due.
• Treasury offset: Tax refunds and federal benefits payments are withheld so they can be applied toward the repayment of your debt.
• Loss of federal student loan benefits: Borrowers in default become ineligible for deferment, forbearance, and the ability to choose a repayment plan, among other benefits.
• Decreased credit score: A student loan in default is reported to the three major credit bureaus, which can damage your credit score and, in turn, hurt your chances of securing financing in the future.
• Transcript hold: Your school might refuse to provide you with your official transcript, preventing you from transferring to another school (though you can still get an unofficial transcript, which some institutions may accept).

Your Options for Preventing Collections

• Rehabilitate your loans: The exact step may vary depending on your loan type, but ultimately you’ll contact your loan provider, request a loan rehabilitation plan, and agree to make a series of nine consecutive payments. So long as you don’t miss any payments, the default status will be removed from your loan.
• Consolidate your loans: A direct consolidation loan is an option for borrowers with more than one federal student loan. It combines those outstanding balances into one debt with just one monthly payment.
• Ask for a lower payment: If you’ve received a garnishment notice, you can try contacting your loan servicer directly to renegotiate your loan’s repayment terms. You’ll need to contact them quickly to avoid wage garnishment and make your first payment no later than 30 days after the date on the notice.
• Request a hearing: You have a right to a hearing in court. There, you can object to any terms of the loan you feel are unjust or speak to any financial hardship that garnishment may cause in order to have collection efforts halted.
• Pay in full: Repaying your loan in full is the quickest and most efficient way to get out of default, though it’s typically not a realistic option.

The Bottom Line

Keeping tabs on your federal student debt and proactively taking steps toward repayment is an absolute necessity if you want to avoid involuntary collections and other consequences. One way or another, your loans have to be repaid (or forgiven), but it’s up to you to decide when and how that’ll happen. If there’s anything you’re unsure about regarding your debt, contact your lender directly for specific details and to ask about resources that can help with your specific situation.