March 23,2014

Debt Adviser: How to deal with student loan debt default

QUESTION: My student loan is in default, and my wages are being garnished. I've already consolidated the loan and performed a loan rehabilitation. Neither has worked. I'm looking for a new way to deal with this situation, and fortunately, I'm now in a stronger position to do so with a better-paying job. How do I get out of default and stop the wage garnishment?

ANSWER: Not enough is said about the huge risk that young people are taking on with student loans. With students having little financial experience, no current income and only the hope of finding a well-paying job, I rate student loans among the most risky - for the borrower. Of course, there is little to no risk for the lender since it is difficult to discharge a student loan debt in bankruptcy if things head south. There is even less risk for the school accepting the proceeds of the loan, since you can't get a refund.

As for your situation: Because you have already attempted and failed two remedies, I'm not sure that your lender is going to be willing to work with you again. You're only eligible to rehabilitate a federal student loan once, so you no longer have that option to stop the garnishment.

Also, your defaulted loan is no longer with the government. It has been transferred to a collector. The government can issue an Administrative Wage Garnishment order, under which 15 percent of your wages can be garnished without anyone taking you to court. So the collector is usually happy to receive regular payments on your loan thanks to the garnishment. It has no real incentive to change the status quo.

Assuming you can afford to pay more than is currently being garnished, you could contact the collector that is managing your loan and attempt to work out a new payment agreement. Should they agree, be sure to get it in writing. You could always send in additional payments to the collector to pay off the loan quicker. You can check how an accelerated payment plan will affect your debt with one of Bankrate's calculators.

The other option you have to stop the garnishment is to pay the loan in full. Depending on how much you owe and your current access to credit, you could pay the loan off with a credit card or a private loan. I would take a pay stub down to your local credit union and ask if they will loan you the money to pay off your student loan debt. They may not, given your damaged credit. But it's still worth a shot. Not only would you be free of the garnishment, you'd be adding positive data to your credit report with a new performing loan. I would not recommend using home equity to pay off the loan, as you would be moving from an unsecured loan to a secured loan.

Finally, remember that the damage to your credit will remain until the credit reporting period has ended (seven years from the date of default). Also, because your loan was turned over to collections, collection fees, plus all accrued interest for the time you did not make payments, have been added to your loan balance.

This experience has given you an education in personal finance that's not taught in schools. Next time, try not to take on a loan until you're sure you'll have the resources to repay it.

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