Student Loan Holders Are Falling Into Default. Here Is a Way Out. - Barron'sSkip to Main ContentThis copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.# Student Loans Are Falling Into Default. Here's a Way Out.ByConstantine YannelisShareResize---ReprintsStudent loan holders in t ...

Core Insights - Over 5.5 million borrowers are currently in default on their student loans, facing negative credit report entries, loss of eligibility for federal aid, and potential garnishment of up to 15% of their after-tax income [1] Group 1: Current Situation - The Department of Education has temporarily paused wage garnishments and involuntary collections, including tax refund seizures, providing borrowers a limited opportunity to address their defaulted loans [2] - Borrowers can utilize this pause to consolidate their loans or apply for loan rehabilitation to restore their loans to good standing before collections resume [2][7] Group 2: Options for Borrowers - Two primary methods exist for borrowers with defaulted loans to regain good standing and avoid future wage garnishments: loan consolidation and loan rehabilitation [3] - A federal student loan is considered in default if payments have not been made for over 270 days [4] Group 3: Loan Consolidation - Loan consolidation involves combining multiple student loans into a single loan, which can help borrowers exit default [5] - To consolidate, borrowers must enroll in an income-driven repayment plan or make three consecutive, voluntary, on-time payments on the defaulted loan [5] - It is important to note that accrued interest is added to the balance upon consolidation, and the record of default and late payments will remain on the credit report [6] Group 4: Loan Rehabilitation - Loan rehabilitation may take longer than consolidation but removes the defaulted loan from the borrower's credit report and does not add accrued interest to the balance [7] - To rehabilitate a loan, borrowers must make nine voluntary, reasonable, and affordable monthly payments over 10 consecutive months, as determined by their loan servicer [7]

Core Insights - Millions of federal student loan borrowers are set to receive wage garnishment notices, which can lead to up to 15% of their wages being withheld due to missed payments [1][4] Group 1: Current Situation - Approximately 9 million federal student loan borrowers are currently in default, having not made a payment for over 270 days [2] - Once in default, the entire loan balance, including principal and interest, becomes immediately due, and wage garnishments will continue until the balance is paid off or the borrower takes action [3] Group 2: Financial Impact - Wage garnishment can significantly reduce take-home pay, complicating household budgets for borrowers in default [4] - The average student loan balance is nearly $40,000, while the median amount in American households' bank accounts is only $8,000, highlighting the financial strain on borrowers [5] Group 3: Options for Borrowers - Borrowers can avoid wage garnishment by paying the full amount of their student loans before garnishments begin [4] - Options to bring loans back into good standing include loan rehabilitation or consolidation, with consolidation being quicker but not removing the default from credit reports [6][7] - To consolidate, borrowers must enroll in an income-driven repayment plan or make three consecutive, voluntary, on-time payments [7] Group 4: Legal Recourse - Borrowers can request a hearing to contest their default status or the amount owed, which must be done within 30 days of receiving the garnishment notice [10][11] - A written request must be submitted to the collection agency, and evidence supporting the objections is required [11]