Student Loans Enter Collection Mode

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Defaulted Borrowers Face Wage Garnishment and More

With the COVID-19 pandemic finally in the rearview mirror, the U.S. Department of Education has announced that it will begin referring student loans that are in default to the collections process. This move affects around 5.3 million borrowers who owe over $130 billion in defaulted student loans. ###

What does it mean for borrowers?

* Referrals for collection will be sent to the Treasury Department’s offset program, which will allow the government to garnish wages, intercept tax refunds, and seize portions of Social Security checks. * Borrowers will receive notices from Federal Student Aid in the coming weeks, outlining their options, including making monthly payments, enrolling in income-driven repayment plans, or signing up for loan rehabilitation. * A student loan becomes delinquent when a borrower doesn’t make a payment 90 days after its due date. If you continue to be delinquent for 270 days, then your loan goes into default, with more severe consequences like wage garnishment. ###

Kat Hanchon’s Story

Kat Hanchon, a 33-year-old information technology professional in Michigan, is one of the borrowers facing more severe consequences. She owes nearly $85,000 in debt between her undergraduate and master’s degrees, and even with an income-driven repayment plan, she can’t afford to pay those loans on top of other expenses like a mortgage and medical bills. “I wanted to throw up as soon as I read the news,” Hanchon said, her voice shaking with anxiety. “I already live paycheck to paycheck.”
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Options for Borrowers

* Borrowers can visit the Default Resolution Group website to make a monthly payment, enroll in an income-driven repayment plan, or sign up for loan rehabilitation. * Loan rehabilitation is a good option for borrowers in default, as it allows them to pay off their loans on time for nine months in a row and come out of default. * Borrowers can also explore income-driven repayment plans, which base monthly payments on income and family size. ###

Other Key Considerations

* Involuntary collection can affect Supplemental Security Income, so borrowers should check their benefits before the collections process begins. * Delinquency can have a significant impact on credit scores, with a drop of 100 points or more possible. * Borrowers can find the status of their student loans and loan servicer information by accessing their studentaid.gov account. ###

Forbearance and Rehabilitation

* Forbearance is a temporary pause on student loan payments granted to borrowers experiencing financial difficulties. Borrowers can be granted forbearance for up to 12 months, but interest will continue to accrue during this period. ###

Finding Student Loan Status

* Borrowers need to know the status of their student loans to find out if they are in default. * Borrowers should also update their personal information, such as email and physical address, to ensure they receive important notifications. ###

Implications for Supplemental Security Income

* Benefits from Social Security are considered income and can be affected by involuntary collections. * Borrowers should check their benefits before the collections process begins. ###

Impact on Credit Scores

* Delinquency can have a significant impact on credit scores, with a drop of 100 points or more possible. * A delinquency stays on your credit report for seven years. ###

Income-Driven Repayment Plans

* Income-driven repayment plans applications are currently open. * These plans base monthly payments on income and family size. * Borrowers can review income-driven repayment plan options by checking the loan simulator at studentaid.gov. ###

Acknowledgments

The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.