Financial Advice

Will My Social Security be Garnished if I Rehabilitate My Student Loan?

Question:

Dear Steve,

Just contacted my Loan Servicer who offered me a $5/mo rehab program for 9 months. I am doing paperwork now and making arrangements for auto deduction. I am also 62 this year and eligible for early social security benefits which I haven’t decided as yet.

Once my loan is under the rehab status, if I apply for early SS benefits, will I be open to possible garnishment or does being in rehab preclude that? I am wondering if I have to wait for 5 payments or all 9 before applying to get SS so I won’t be open for possible garnishment. Thank you!

Ghary

Answer:

Dear Ghary,

In a rare event I get to deliver exceptionally happy news. You’ll be fine.

Once you rehabilitate your loans they will no longer be in default and thus there is no reason for an Administrative Wage Garnishment (AWG). So your Social Security benefits will be safe.

Keep in mind, you can only rehab a loan once. So make sure once the loan is out of default that you opt to repay it using an income driven repayment program. This will keep you out of default moving forward and give you the lowest payment, although it is unlikely you’ll ever pay the loan off.

If you have multiple loans then you should consolidate all your loans into one new Direct Loan once you are out of default. Then opt for an income driven repayment program. Your servicer should assist you with this if you ask. There is no charge to do any of this.

Now, I can’t remember a situation where someone I’ve known has had an AWG start while in a rehab repayment. But it is probably not worth risking being the first person I know to have that happen. I’d wait till you’ve made at least five confirmed rehabilitation payments before starting your Social Security benefits. So you could probably start the Social Security application process after your third rehab payment. The official information says you should be safe once you’ve made “some” rehab payments but who knows in government speak what “some” means.

The official process once you successfully complete your rehabilitation is supposed to be:

“Once a rehabilitated loan is transferred from DMCS [Debt Management and Collection System] to a non-default servicer, the borrower is automatically put on an alternative repayment plan with a monthly payment amount equal to the amount he or she was paying DMCS in order to achieve eligibility for rehabilitation. This alternative repayment plan remains in place for 90 days, during which the borrower has the opportunity to apply for another available repayment plan based on the loan(s) in question; this may include Income-Driven Repayment (IDR), depending on the loan type. If the borrower does not apply for a repayment plan, he or she is automatically converted to a standard repayment plan after 90 days. Typically, information regarding the borrower’s options is provided in the welcome letter from the servicer at the time the account is loaded to the servicer’s database.” – Source

Don’t rely on the servicer pushing you through this process, you will need to watch over them to make sure you don’t miss the selection of repayment option once you are rehabilitated.

Steve Rhode
Get Out of Debt GuyTwitter, G+, Facebook

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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.

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