Student loan repayment troubles? Don't delay

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question Dear To Her Credit,
I lost my job three years ago. I lost everything as a result. I took a $12,000 pay cut and got another job, but I have been trying to catch up ever since.

I owe a federal student loan of $9,800. I was trying to establish a payment plan, but instead of agreeing to a plan, they garnished my pay by nearly $300 without any prior notice. Now I can't even afford to pay my rent. They will not negotiate. Would filing for bankruptcy stop the garnishment? -- Denise


Dear Denise,
I hate to see you file for bankruptcy over a $9,800 student loan. I generally recommend it only when a person's consumer debt is more than their annual income and they don't see any way to pay the debt in the foreseeable future. Bankruptcy costs too much in time, money and future consequences to be used as anything other than a last resort.

Another problem with bankruptcy is that it probably won't get rid of your student loan debt. Long ago, students could finish their education, have student loans discharged in bankruptcy while they were still young and broke, and then start their careers unencumbered by debts for the education that made those careers possible.

Now, unfortunately for you, the rules have changed. Student loans are generally not discharged in bankruptcy.

The Federal Student Aid Ombudsman states that for you to have your loans discharged in bankruptcy, a bankruptcy court must answer "yes" to three questions:

  1. Will repaying your student loans prevent you from maintaining a minimal standard of living?
  2. Will your hardship continue for much of the loan repayment period?
  3. Did you make an effort to repay the loan before filing for bankruptcy? (In practice, this means repaying your loan for at least five years.)

There are other ways besides filing for bankruptcy to stop collectors from garnishing your wages. Have you tried to get a deferment or forbearance on your student loan?

You may be able to defer repayment of a student loan if you meet the criteria and conditions for your type of loan, and you are not more than 270 days behind in your loan payments (or six months behind for an unemployment deferment on a Federal Family Education Loan).

Some common reasons for a deferment are being enrolled in school half-time, being unemployed, suffering economic hardship or serving in the military.

Forbearance of a student loan is a little different. You may qualify for forbearance even if you have defaulted on the loan. Forbearance means you can make reduced payments for a time; for example, while you are ill or if your monthly payments total more than 20 percent of your monthly income. In some cases, forbearance means you can stop making payments for a time. Interest continues to accrue during this time.

Another place you can seek relief is from the court that approved the garnishment. Rules vary by state, but your creditor should have given you advance notice before garnishment. Now that they are garnishing your pay, your options are more limited. Look up the rules for garnishment in your state and make sure they are not taking more than the limit allowed by state law. You can ask the court to adjust the amount if it is causing you financial hardship. If that won't work, I suggest you find a way to increase your income, either by taking on a second job or reducing your living expenses, perhaps by moving in with a friend or relative until the loan is paid off.

Good luck!

See related: Steps to contest, end wage garnishment, Why not leave country and bail on student loans?

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Updated: 03-23-2019