Non-Bankruptcy Solutions for Federal Student Loans
Student loan debt in the United States recently crossed the $1.2 trillion mark. Many of our clients face large student loan payments in addition to their car and mortgage payments. A common question is “If I default om my student loan payments, what can happen to me?” The consequences of defaulting on a student loan can be staggering, depending on the type of loan you have. Federal student loans are loans that are insured or guaranteed by the US Department of Education (“USDE”). A federal student loan is considered to be “in default” after it is more than 270 days past due, or after roughly 9 months of no payment.
What Happens If I Default On Student Loans?
In the event of default, the USDE has numerous options available to collect the debt. These options include collection calls, tax refund intercept, Social Security offset, and administrative wage garnishment. Administrative wage garnishment permits the USDE to garnish wages without a lawsuit. Additionally, a 25% collection fee may be added to the balance of the loan, further increasing its burden on clients’ lives.
Thankfully, there are several options available for clients that have defaulted on their loans. These options include settlement, loan consolidation, and rehabilitation. The most common solution is loan rehabilitation. Rehabilitation has several benefits, including having a payment that is reasonable and affordable. It will also clear the client’s credit report of default notations after 9 monthly payments.
Loan consolidation is like a mortgage refinance. Consolidation can be an effective solution, so long as a wage garnishment is not already in place. Settlements on federal student loans are rare, since the client would need to make a lump sum payment and there is typically only a 10%-30% discount on the balance.