Many people take out student loans for college, only to struggle to repay them after the fact. But falling behind on that debt could have serious consequences.
As of the first quarter of 2019, there were an estimated 5.2 million federal student loan borrowers in default on their debt, according to our Student Loan Debt Statistics for 2019. And these borrowers risk having their wages garnished as a result, thereby kick-starting a dangerous financial cycle.
When federal loans go into default
Let's be clear: Missing a single federal student loan payment won't trigger a full-fledged default. To reach "default" status, you'll need to go for 270 days without making a payment. This means that if you're experiencing temporary financial hardship, you have time to work through it before officially landing in the default zone.
Once you are in default, however, the U.S. government can garnish your wages in an effort to recoup the money it’s owed. Not only will you lose a portion of your income once that happens, but that default will also be reported to the major credit bureaus, thereby dragging your credit score down into what could be very unfavorable territory. And once that happens, you might struggle to borrow money when you need to.
A better bet, therefore, is to avoid defaulting on your debt. And the good news is that the U.S. Department of Education, which issues federal loans, offers a number of protections that can help you avoid that unwanted fate.
Don't land in default
The moment you find yourself struggling to make your federal student loan payments, reach out to your servicer and see what options are available to you. As a federal student loan borrower, you may be eligible for an income-driven repayment plan, wherein your monthly payments are recalculated based on a reasonable percentage of your income. That percentage can't exceed 20%, and in some cases will be as low as 10%.
You can also apply for deferment or forbearance, both of which will let you hit pause on your loan payments until you're able to get back on your feet. If you're eligible to defer your loans, you won't accrue interest during the period you're not making payments. With forbearance, you do accrue interest, but you still get that underlying relief of not having to make payments for a while.
Getting out of default
Once you officially default on your student loans, it can be tricky to escape the consequences. One way to go is to pay off your loan balance entirely, thereby absolving yourself from that obligation. But that route is probably off the table as chances are that if you defaulted on your debt, you're not sitting on piles of cash that can be used to pay it off.
Assuming you can't get out of default by paying off your balance, your other options include loan rehabilitation or consolidation. With the former, you make nine monthly payments to get out of default, during which time your wages will continue to be garnished. With the latter, you make three consecutive, on-time payments on your loan and then consolidate it with another. If you don't have another loan that's eligible for consolidation, your only options are to repay your entire loan balance or get yourself on a rehabilitation plan.
Defaulting on federal student loans is bad news no matter how you look at it, so don’t let it happen to you. If you’re having a hard time keeping up with your payments, pursue the above remedies. It’s a far better bet than landing in a situation wherein your wages are garnished and your credit score takes a disastrous tumble.