Question:
Dear Steve,
I have been getting approx 12% of my wages garnished for defaulted federal student loans for the last few years. After reading your newsletter, I decided I should rehab them to help clean up my credit (note: bankruptcy is likely in the near future, and I am ok with that). However, when I calculated the percentage currently being garnished, it’s only 12%–which is less than the 15% standard, and significantly less than the 25% total allowed by WA state, where I am a resident.
I certainly don’t want to pay more than 12% of my monthly income-in fact, I was hoping to pay LESS. So why should I risk having to pay more, instead of just allowing the garnishment to continue, regardless of what it does to my credit? Whenever landlords have run credit checks and have seen that my scores is low b/c of school loans and medical bills, they just laugh b/c it’s so common.
In other words, I don’t feel like I have any incentive to rehab at this point in my life (I’m 46 years old, graduated from veterinary school about five years ago, and never worked in my field, if that matters.)
Thanks for your advice,
Karen
Answer:
Dear Karen,
You raise an excellent point. There are absolutely times when it is better to hold onto a garnishment than stop it. For example, when the garnishment is less than a proposed minimum payment. This typically happens with private student loans.
But for a federal student loan the rehabilitation route to clean up your credit is a reasonable way to go, especially if you enter an income driven repayment program following a successful rehab.
The vast majority of people who enter a rehab qualify for a $5 rehab payment on top of the garnishment. So the cost is really low to get out of default. You are looking at $25-$45 in rehab total payments.
I suppose the best answer is going to be what your income driven payment would be after you get out of default. You can use this repayment estimator. As part of the rehab process the servicer should assist you in entering an income based payment.
As far as the hurt a defaulted student loan puts on your credit, it is so common and will be more so in the future. The impact is going to be when your lower credit score impacts your costs of other goods and services, like insurance premiums or future loans.
If you had to decide between having a good credit score or not, the logical answer is always to play the game and have a good score if the solution makes sense. However, that being said, you should not live for your credit score.
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