Charles Esther
This summer, millions of student-loan borrowers who are in default may see their wages and federal benefits seized.
After a five-year pause on collections that began under former President Donald Trump and continued through President Joe Biden’s term, the collections process has now resumed.
On May 5, the Education Department began sending notices to about 195,000 defaulted borrowers.
These notices warned that some of their federal benefits, such as Social Security, may be withheld starting in early June.
Later this summer, all 5.3 million defaulted borrowers will be informed that their earnings could be subject to wage garnishment.
Borrowers who haven’t made payments in over 270 days are considered in default.
They now face serious consequences — but there are several routes available to help avoid garnishment.
The Stress of Restarting Payments After Years of Relief
During the pandemic, borrowers enjoyed a break from wage garnishments and negative credit reporting.
This relief, though temporary, lasted for five years.
Now, many are struggling to reintroduce student loan payments into their budgets.
Student-loan attorney Rae Kaplan said the restart is causing panic.
She noted that five years is a long time to get used to not making payments, and now many are caught off guard.
Option 1 – Loan Rehabilitation
Loan rehabilitation is one path borrowers can take.
Though it takes longer, it can offer long-term benefits.
Borrowers must make nine payments within 20 days of their due date during 10 consecutive months.
These payments are based on income — up to 15% of the borrower’s discretionary income divided by 12.
Kaplan noted that some borrowers can qualify for payments as low as $5 per month.
Despite entering rehabilitation, garnishment of wages and benefits may continue temporarily.
Garnishment stops only after five payments or once the loan is out of default.
It’s important to note that rehabilitation is a one-time opportunity.
If a loan goes into default again, this option won’t be available.
An added benefit of rehabilitation is the potential improvement in credit scores.
Once completed, the borrower’s loan will be considered current and in good standing.
Option 2 – Loan Consolidation
Loan consolidation is a faster way to resolve default.
Borrowers can combine their loans into a federal direct consolidation loan.
To do this, they must either agree to repay under an income-driven repayment plan or make three consecutive full payments before consolidating.
Unlike rehabilitation, consolidation does not remove the record of default from the credit report.
However, it does restore access to federal benefits like forbearance, deferments, and forgiveness programs.
Option 3 – Bankruptcy
Filing for bankruptcy is another option for borrowers who cannot pursue rehabilitation or consolidation.
Bankruptcy can provide immediate protection from wage and benefit garnishment.
Once a borrower files for bankruptcy, debt collectors must cease all collection efforts.
Iowa attorney Dustin Baker told Business Insider that bankruptcy offers a four- to five-month break.
This can give borrowers time to regroup and consider their next steps.
Since 2022, the process to discharge student loans in bankruptcy has become more streamlined.
Thanks to new guidelines issued under Biden’s administration, discharging student loans is now more achievable.
Baker said the government has allocated more resources, making it easier for borrowers to find relief.
Importantly, this change has been supported across party lines.
