Mil­len­nial woes: Stu­dent loan de­fault can gut your pay­check

The Detroit News - - ARTS& STYLE - BY KELSEY SHEEHY Nerdwal­let

There’s a dirty lit­tle se­cret of the stu­dent debt cri­sis – one that af­fects mil­lions of bor­row­ers, but isn’t talked about at din­ner tables, on so­cial me­dia or in think pieces about stu­dent loans.

The taboo topic is wage gar­nish­ment and it works like this: De­fault on your fed­eral stu­dent loans and the gov­ern­ment can take up to 15 per­cent of each pay­check to sat­isfy your debt.

That amounts to $300 per month for some­one who nor­mally takes home $2,000 per month.

The Ed­u­ca­tion Depart­ment can also with­hold fed­eral ben­e­fits like tax re­turns and So­cial Se­cu­rity pay­ments.

Gar­nish­ment is an ef­fec­tive tool to re­coup un­paid loans – pri­vate col­lec­tion agen­cies en­listed by the Ed­u­ca­tion Depart­ment took in over $841.6 mil­lion via wage gar­nish­ment in the 2018 fis­cal year – but it in­flicts se­ri­ous fi­nan­cial strain on bor­row­ers who are al­ready strug­gling.

“It’s a very pow­er­ful col­lec­tion tac­tic that can re­ally dev­as­tate the fi­nan­cial lives of the peo­ple sub­jected to it,” says Joanna Dar­cus, a staff at­tor­ney at the Na­tional Con­sumer Law Cen­ter who works with low­in­come stu­dent loan bor­row­ers. “They can’t af­ford to pay their rent, buy their medicine, buy clothes for their kids and also pay a large per­cent­age of their wages toward their stu­dent loan.”

If you re­ceived no­tice of gar­nish­ment or are al­ready in the thick of it, don’t panic; you have op­tions that are far less painful than a 15 per­cent hit to your pay­check.

The ideal time to take ac­tion is when you be­gin strug­gling to make pay­ments. At that point, your loan ser­vicer can help you ex­plore other re­pay­ment op­tions , in­clud­ing in­come-based plans that cap your monthly pay­ment.

Once your loans are in de­fault – nearly nine months past due for most fed­eral loans – those op­tions are off the table un­til your loan is in good stand­ing. You can re­ha­bil­i­tate your loans to move out of de­fault (more on that below).

You also have a brief win­dow to con­sol­i­date your fed­eral loans (com­bin­ing them into a sin­gle loan with its own in­ter­est rate) be­fore the Ed­u­ca­tion Depart­ment, via a pri­vate col­lec­tion agency, moves to gar­nish your wages.

The col­lec­tion agency han­dling your fed­eral loans will no­tify you by mail be­fore it starts gar­nish­ing your wages. The no­tice serves as your 30-day warn­ing. Dur­ing this time, you can stop the process by ne­go­ti­at­ing pay­ment ar­range­ments with the agency. The key: It must re­ceive your first pay­ment in that 30-day win­dow.

If you can’t make a pay­ment within that win­dow, re­quest a hear­ing to ap­peal the gar­nish­ment. To pre­vent gar­nish­ment from start­ing, you must re­quest the hear­ing in writ­ing within 30 days of the date on your col­lec­tion no­tice. You can still file an ap­peal af­ter gar­nish­ment starts, but the col­lec­tion agency will con­tinue to take up to 15 per­cent of your take-home pay while the case is re­viewed, which can take two to three months .

A hear­ing sounds in­tim­i­dat­ing but it’s no more than a long form de­tail­ing your in­come, debt and ex­penses. The goal is to stop or re­duce gar­nish­ment.

“You hear the word ‘hear­ing’ and think, ‘Oh my god, I need an at­tor­ney!’ But it’s just a ba­sic ex­change of in­for­ma­tion,” says Betsy May­otte, founder of The In­sti­tute of Stu­dent Loan Ad­vi­sors.

Con­tact the col­lec­tion agency han­dling your loan to talk about

pay­ment ar­range­ments or get de­tails on a hear­ing re­quest. Not sure whom to call? Check the Na­tional Stu­dent Loan Data Sys­tem to find out who is man­ag­ing your loan and how to reach them.

Loan re­ha­bil­i­ta­tion is a one­time “Get out of de­fault” card. Here’s how it works:

The col­lec­tion agency sets a monthly pay­ment based on your in­come, mi­nus any rea­son­able monthly ex­penses.

The amount could be as low as $5 a month.

You’ll need to pro­vide doc­u­men­ta­tion, like copies of pay stubs and bills, and com­plete a de­tailed form to help de­ter­mine the amount.

Any wages gar­nished due to de­faulted stu­dent loans will be con­sid­ered among your ex­penses.

Make nine pay­ments of the agreed-upon amount within 10 months and your loans move out of de­fault.

Any wage gar­nish­ment will stop. And you’re once again able to choose a re­pay­ment plan that works for you, in­clud­ing sev­eral in­come-based op­tions that could drop your monthly pay­ment to $0.

Once out of de­fault, take care to stay out. Make your pay­ments each month. Re­cer­tify your in­come ev­ery year if you’re on an in­come-based plan.

And call your loan ser­vicer if you run into trou­ble. If you de­fault a se­cond time, you’ll have fewer op­tions.

Elise Amen­dola / AP

De­fault on your fed­eral stu­dent loans and the gov­ern­ment can take up to 15 per­cent of each pay­check to sat­isfy your debt. The Ed­u­ca­tion Depart­ment can also with­hold fed­eral ben­e­fits like tax re­turns.

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