Get Out of Debt Guy

My Student Loans are in Default and Garnishing My Wages

Posted May 23, 2014

WRAL Reader Question

Dear Steve,

My wages are being garnished at 15% of my income for defaulted Student Loans (Federal Subsidized and Unsubsidized Stafford Loans). This equates to approximately $900-1000/month in payments. The amount now due (as fees, etc. have been added to my loans) is now $100k (originally around $60k). The loans were transferred by DOE to a third-party agency, and they have told me that they are being generous by taking an additional $620/month for rehabilitation, that it should be $1400.

There is no way that I can afford the $620/month (much less the $1400). I live in Washington, DC (high cost of living to begin with) and just cannot afford this as I'm also trying to pay off medical bills from last year and credit card bills.

Should I ask to consolidate my student loans now (realizing that it will be for the $100k) in order to get a lower payment?

Should I wait until July 2014 to go back to the third-party agency and ask them to give me a new quote for a monthly rehabilitation cost? If so, would that rehabilitation time period be 5 months?

Is there a way to get my AWG down to 10% of my AGI in July 2014?


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Dear Heather,

Your situation is unfortunately common. People often let their student loans fall into such disrepair and then before they know it they are being garnished or tax returns are being intercepted. 

The good news is these are federal loans and there are good options.

In the past the rehabilitation route was one of the few options to get loans back under control. Today though it makes little sense. If your wages are being garnished the rehabilitation program requires nine full payments on top of that to bring your loans out of garnishment.

In July the rehabilitation program is changing and it will only take five payments and even then the payments will be dependent on your income. 

But the first solution I'd look at would be to consolidate your loans to get them out of default and then see if you are eligible for either loan forgiveness or an income based repayment program. More tips and suggestions can be found here.

According to the Department of Education you can consolidate out of default.

"You also have an option for getting out of default through loan consolidation. Loan consolidation allows you to pay off the outstanding combined balance(s) for one or more federal student loans to create a new single loan with a fixed interest rate.

A defaulted federal student loan may be included in a consolidation loan after you’ve made arrangements with ED and made several voluntary payments. Usually, you would be required to make at least three consecutive, voluntary, and on-time payments prior to consolidation.

Note: A guaranty agency may charge collection or late fees up to 18.5 percent of the outstanding loan (including the principal and interest). The fees become part of the principal for the consolidation loan. For example, a defaulted loan of $8,500 plus $1,500 of accrued interest = $10,000. Fees of $1,850 can be added to the $10,000, which means the consolidation loan will be made for $11,850."

Steve Rhode
WRAL Get Out of Debt Guy

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  • rogueangel2 May 23, 2014

    Follow up - I investigated service providers and started to sign up for a consolidated loan, but found this statement in the borrower understanding section: "If I am consolidating a delinquent Federal Consolidation Loan that the lender has submitted to the guaranty agency for default aversion or a defaulted Federal Consolidation loan, and I am not including another eligible loan, I must agree to repay my Direct Consolidation Loan under the ICR Plan or the IBR Plan." This would put me right back at 15% of my income, wouldn't it?

About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.