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Debunking a myth about wage garnishment and student loans

Paying a token amount won't keep creditors at bay

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Credit Care
'Credit Care' columnist Kim McGrigg
Kim McGrigg is Community Manager for Money Management International, where she provides personal finance education information to consumers.

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Question for the CreditCards.com expert

Dear Credit Care,
I defaulted really badly on my student loan. Now they are threatening me with up to 50 percent garnishment and have been calling my work. I called to offer a "reasonable and affordable" plan, but they asked for WAY too much -- almost 50 percent of my pay. Ha! Yeah, cannot do it. Somewhere, at some time, I heard that even if you send $5, they cannot garnish your wages. Is this an old wives' tale? Regardless of if it is or isn't, I did send a money order for $100 and kept all the documentation. I certainly hope this will keep them away. I don't really care if they keep contacting me. As long as they don't touch my earnings, I can keep surviving! The minute they do, I'm toast! -- Nydia

Answer for the CreditCards.com expert

Dear Nydia,
The notion that paying a token amount will keep creditors at bay is an attractive sounding story,  but it's just a myth. Paying a token amount will not keep creditors at bay on student loans or any type of loan.

And with student loans, you're in a tougher spot. The truth is that you are going to have to find some way to pay what you owe on your student loan because it is very unlikely you will get out from under the debt. It is extremely difficult to have a student loan dismissed in a bankruptcy. You must prove "undue hardship" and not having enough income to make payments is not considered an undue hardship.

It would be best if you could work out a repayment agreement with whoever currently owns your student loan debt. Because you state you "defaulted really badly," it is likely that your loan is in collections and is no longer held by your original student loan lender. That means you will likely have to negotiate your repayment with the debt collector and not the loan issuer. If negotiations fail, the collector will be allowed to garnish 15 percent to 25 percent of your net wages per federal law -- not the 50 percent that they are apparently threatening. If you have a federal loan, they can garnish up to 15 percent. If it’s a private loan, the rules vary state by state, but the number can rise to 25 percent.

However, there may be good news if your loan is backed by the federal government. The Higher Education Act (HEA) provides that you have one chance to rehabilitate your loan and get it out of default. You would be required to make nine consecutive on-time "reasonable and affordable" payments to qualify for rehabilitation. And you have considerable input in deciding what's "reasonable and affordable." Be prepared to document your income and expenses, but the creditor cannot simply impose a payment on you.

Once you know what you can realistically afford to pay for nine consecutive months, contact the collector and let them know you are aware of your rights under the HEA and the Higher Education Opportunity Act (HEOA), a 2008 amendment to the HEA. Inform them that you're requesting that your loan be rehabilitated. The collector may balk at your monthly payment amount, but stick to the plan and keep stating you know your rights. Put the monthly payment amount and request for loan rehabilitation in writing and send it to the collector via certified mail, return receipt requested. Be sure to review any written agreement from the collector carefully before signing and returning.

Then, you must make your payments every month, on time, for nine months. Once you do, the collector must then sell your loan to a student loan lender. This effectively removes your loan from default. The not-so-good news is that once your loan is with another student loan lender, your monthly payment will likely increase. However, with a loan that is not in default, you have repayment options that could help bring your monthly payment down to a more manageable amount. Visit the website for Federal Student Aid, an office of the U.S. Department of Education, to determine which options you may qualify for.

Remember, you have only one chance for rehabilitation for this loan, so only take these steps if you know you will be able to make the required payments for nine consecutive months.

Handle your credit with care!

See related: 11 tips for handling debt collectors, Cure your defaulted student loan in six steps, How wages are garnished -- and how to avoid it, 3 ways to rebuild your credit after wage garnishment, 4 steps to settling privately funded student loans

Kim McGrigg is the community manager for Money Management International, the largest nonprofit, full-service credit counseling agency in the United States. You can find more money management advice on Blogging for Change and MMI's Facebook page.

Credit Care answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to Credit Care.

Published: May 23, 2011



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