By coinnews 
00:00 Speaker A
If borrowers in default don’t take any action, what exactly happens?
00:06 Speaker B
Well, a borrower in default uh can face what are called enforced collection methods. The the first of them will be administrative wage garnishment where 15% of their wages will be sent from their employer to the federal government. Uh then there’s uh what are called Treasury Offset programs, TOP, which include intercepting federal income tax refunds and offsetting up to 15% of social security disability and retirement benefit payments.
00:55 Speaker A
Now, defaulted borrowers, they they’ve got kind of three main options to avoid those penalties. What are the pros and cons of each?
01:05 Speaker B
Okay. So, they can rehabilitate their federal student loans and there two main methods of doing this. One is to make nine out of 10 consecutive, full, voluntary, reasonable and affordable payments through a loan rehabilitation agreement. The other is to consolidate their loans. Now, the pros and cons of these are consolidation is much quicker, but it doesn’t remove the default from your credit history, whereas the other one does. And also, the interest and collection costs may be added to your loan balance, digging you into a deeper hole. Finally, uh, borrowers who rehabilitate their loans through consolidation may be restricted to an income-driven repayment plan, which might be the right solution for them, but they will have no choice but to repay under an income driven repayment plan.
02:31 Speaker A
For student borrowers who may not be in default yet, but are worried about their finances. What are some options for those with short-term financial challenges?
02:43 Speaker B
Well, if you’re experiencing a short-term financial difficulty such as medical or maternity, paternity leave or you’ve been on you’ve lost your job, but you expect to get a new job soon. You might consider a deferment or forbearance. Uh deferments include the economic hardship deferment, the unemployment deferment, and the cancer deferment, if you’re being treated for cancer. And the main forbearance is the general forbearance. These suspend your repayment obligations um while you fix your financial situation. They are short-term in duration, typically less than a year in duration and a maximum of three years. And interest will continue to accrue in most of for in all forbearances and most deferments. And that means that the amount of your debt will increase. And as I said, that digs you into a deeper hole. So it’s not a long-term solution, but it’s reasonable solution for avoiding default um if you just have a short-term financial challenge.
04:35 Speaker A
And so that’s on the short-term side, but what can borrowers with long-term financial challenges do?
04:44 Speaker B
If you have a job, but it just doesn’t pay well enough to repay your loans and you have no prospects for increasing your income, you should consider switching to a different repayment plan. Uh extended repayment and income-driven repayment have lower monthly payments than the standard 10-year repayment. They reduce your monthly payments by increasing the repayment term to 20 or 25 years. Now, that’s going to increase the total cost of the loan because you’re going to be paying interest for a longer period of time, but that’s better than defaulting on it. Now, the income driven repayment plans base your monthly payment on a percentage of your discretionary income as opposed to the amount you owe, and that may yield a much more affordable monthly payment.