How to Prevent Unpaid Student Loans From Haunting You In Retirement

defaulted student loans

Although getting a college degree is a big dream for many Americans, 44 million walk away from school with student loan debt.

And, nearly ten percent of those people end up going into default. What’s more, the consequences of default can haunt them for years (or even decades) later.

One man found that out the hard way. His defaulted student loans ended up catching up to him in his retirement, resulting in garnished wages and financial hardship.

Struggling to pay back debt

Jamie Chastain graduated from the University of Southern Florida with a master’s degree in liberal arts in 1982. He left school with just $12,500 in student loans, but struggled to find a job.

As he was struggling to make ends meet, Chastain also could not keep up with his student loan payments.  It took nearly ten years before he finally found steady work as a media technician at a local community college.

Defaulted student loans

Because Chastain defaulted on his student loans, the government garnished his wages. They took out approximately $400 a month throughout his career to pay his student loans.

Due to high interest rates, his student loan balance ballooned. Chastain says he has paid back nearly three times the original loan balance through wage garnishment. 30 years later, he was still making payments.

Can social security be garnished?

Chastain found out that his nightmare was not over, even when he retired.

At the age of 68, the government continued to take money from him, this time by garnishing his Social Security checks. The government took out $177 a month from his Social Security benefits for over a year before Chastain paid off his debt.

And Chastain certainly is not alone. According to Fortune magazine, the government has garnished the benefits of 114,000 Americans 50 and older because of defaulted student loans.

What’s more, since 2001, the government has collected about $1.1 billion by reducing Social Security checks. However, doing so left thousands of retired and disabled borrowers below the poverty line because of their garnished benefits.

What happens when you default

Federal student loans go into default when you have not made a payment in 270 days or more.

Once that happens, the government can seek repayment through various means, including garnishing your wages, taking your income tax refund, or reducing your federal benefits like Social Security.

And going into default has other serious consequences, as well. For instance, you lose out on federal student loan perks like the option to enter into an income-driven repayment plan, forbearance or deferment.

Additionally, your lender will report your delinquent loans to the major credit bureaus, harming your credit and hurting your chances to get approved for a mortgage or car loan down the road. Your lender can also send your debt to collections.

Going into default may increase your student loan balance due to late fees, additional interest, court costs, and collection fees. Your balance will ultimately become much higher than it originally was.

What to do if you are in default

It can take years to get out of default once you enter it. So if you are already in default, it’s important to take action as soon as possible to keep your loan balance from ballooning and your credit from getting ruined.

There are three options for fixing your default situation:

1. Pay in full

To get out of default and rebuild your credit, you can pay your entire loan balance in full to your lender.

This option may be a good idea if you have been in default for a while and now have a lower balance due to wage garnishment. You can then use your savings to pay off your loans and get back on track.

2. Loan rehabilitation

Loan rehabilitation is an option if you cannot afford to pay off the balance in full. Under this process, you contact the lender and agree to make nine on-time monthly payments.

Depending on your situation, you may be able to get your payments reduced to a percentage of your discretionary income.

3. Refinance

While you likely will need a co-signer because defaulting can harm your credit, refinancing is another option to get out of default. You can take out a new loan through a private lender and pay off the defaulted loan in full.

Take action now

If you have defaulted student loans or are in danger of defaulting on your loans, reach out to your lender as soon as you can and explain your situation.

By working with your lender, you may be able to enter a rehabilitation program or get a reduced monthly payment that makes your loans more manageable. Going that route can salvage your credit and help you save money over the long term.

For more information on what to do if you have delinquent student loans, check out this article on preventing and dealing with default.

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