Choosing to end your student loan payments, will hurt you more in the long run. The longer you wait to make payments, the more interest you will have to pay over time. In the past year, the federal student loans’ interest rate was 4.45% but for the 2020-2021 academic year, the interest rate will increase to 5.05%. This will be the second consecutive year the interest rate has risen. Thus, you should take advantage of the rate as of right now before it increases again.
Not making your loan payments may result in your loans being labeled as delinquent, which will then lead to your loans going into default. Defaulting on your loan has severe consequences.
To better manage your debt, it’s important you understand:
How missing a loan payment is not good
- Your loans become delinquent the first day after you miss a payment.
What default means
- If your loans continue to be delinquent, the loan may go into default.
The consequences that come with default
- Having a loan in default can harm your credit score and make renting a new apartment, buying a new car, and many other financial transactions difficult.
- Your wages will be garnished, which means that your employer may be required to withhold. a portion of your paycheck and send it to the loan holder to repay your default loan.
- You will lose the ability to choose a repayment plan and your eligibility for additional federal student aid.
- Your loan holder has the right to take you to court.
How to proceed if your loan is in default
- If your loan is in default you should contact the organization that notified you of the default as soon as possible so you can explain to them your situation and eventually make repayment arrangements.
The government labels federal student loans as defaulted after 270 days, and private loans usually default after 120 days. Having a loan in default can harm your credit score and make renting a new apartment, buying a new car, and many other financial transactions difficult.
There is no statute of limitations for collecting payments for federal student loans, and federal student loan holders don’t need to have a judgment against them in court for wage garnishment. Debt from private loans usually disappears from your credit report after seven years, and a court order is required for wage garnishment.
How Student Loan Wage Garnishment Works
Student loan wage garnishment, whether you have a federal or private loan, usually starts from three to six months after default. The loan holder sends a letter to the borrower to notify him or her about wage garnishment. If you request a hearing within 30 days of receiving the notice, the order will be postponed until the hearing is finished. If you miss this deadline, the garnishment order will proceed. However, you might be able to have it removed or adjusted during the hearing.
Your Options in a Hearing
You can show that your loan default was an error, or you can prove that wage garnishment will cause financial hardship. Borrowers usually submit a financial disclosure form to show exactly how wage garnishment would be a financial burden. If your living expenses seem reasonable compared to IRS averages for similar families, you could get the garnishment removed. However, you may need to attend hearings regularly to keep the garnishment from returning. You can choose an oral or written hearing, and oral hearings can be conducted by phone or in person.
How Much Money Can Be Garnished
Your loan holder can order your employer to withhold up to 15% of your paycheck to collect your defaulted debt without taking you to court. If more than one lender wants to start a wage garnishment, the total amount can’t be more than 25 percent of your net earnings or the difference between your income and 30 times the federal minimum wage, whichever number is smaller. Collection charges for garnishment could add up to thousands of dollars, up to 24 percent of the amount due for your loan.
How to Stop Wage Garnishment
Before you go to court or a hearing, speak to your lender about consolidating your loans or signing up for an income-based repayment plan. You can also enter a loan rehabilitation agreement. In most of these plans, you can make nine monthly payments during a 10-month period. Payments are 15 percent of your discretionary income, which can be as little as $5.
Ask Frank for more information about student loans and wage garnishment. Even after a garnishment, you can raise your credit score and get back into financial shape.