If you’ve fallen behind on your student loan payments, the Department of Education is about to use your paycheck to get your attention.
The Department of Education announced it resumed involuntary collections on student loans on May 5. That same day it began sending 30-day notices to student loan borrowers that their income tax refunds and federal benefits would be withheld, known as the Treasury Offset Program.
“Later this summer, all 5.3 million defaulted borrowers will receive a notice from the Treasury that their income will be subject to administrative paycheck garnishments,” the statement said.
Federal student loans enter default after 270 days of delinquency. Loan servicers can first report loans that are 90 days late, which can be reported to credit bureaus and hurt your credit score. After a loan enters default, the consequences become more severe.
Experts noted that this does not affect borrowers who are making repayments, including those enrolled in the SAVE plan, but they recommend taking action now. “Defaulted borrowers should act quickly to stop collection efforts by contacting the department’s default resolution group,” student loan expert Ellen Rubin said in an email.
You can check the status of your federal student loans at StudentAid.gov or by contacting your service provider. If your loans are in bad standing, you have three options right now.
Direct loan consolidation: Quick relief if you have multiple loans
Consolidating your defaulted loans into a Direct Loan Consolidation is the fastest way to get out of default (other than paying it off). However, there are a few things to consider. First, are you eligible for consolidation?
“If you defaulted on a Direct Consolidated Loan, you may need at least one other eligible loan to consolidate,” Rubin said. “If you don’t have any additional loans, consolidation may not be an option for you.”
Second, understand that consolidating your loans will stop collection activity, but there will still be consequences.
“Although consolidation is faster, it does not remove the default from the borrower’s credit history and interest and collection costs may be added to the outstanding loan balance,” student loan expert Mark Kantrowitz told CNET in an email.
If you choose to consolidate, you will have the option of entering an income-driven repayment plan or making three consecutive on-time payments to qualify for consolidation. If you enroll in an IDR plan, the process can take up to 90 days, Rubin said.
Debt rehabilitation: Takes longer but can help rebuild credit
Debt rehabilitation takes longer than consolidation, because you’ll need to make nine consecutive on-time payments, depending on your income. After that, your loan is considered out of default and the default (but not the delinquency) is removed from your credit report.
If you decide to do loan rehabilitation before the payroll garnishment begins, Kantrowitz said your wages won’t be garnished while you’re making payments. “But, if the borrower’s loans are already subject to forfeiture, nine out of 10 payments are in addition to involuntary forfeiture payments,” he said.
Rubin said you should carefully consider your goals before taking action. “If the primary purpose is to rebuild credit and eliminate a default record, rehabilitation may be the best option,” she said. “On the other hand, if the borrower needs to qualify for additional financial aid in the near future, consolidation may be a more practical choice.”
Pay off the entire balance: The best, but hardest option
If you’re already struggling, this probably isn’t an option. However, the Department of Education said you can avoid collections and negative credit reporting by paying off your loans within 65 days of being notified that your loans are in default. You can view your loan balance through your loan servicer’s account or by logging into StudentAid.gov using your Federal Student Aid login and password.