Millions of students have taken out private student loans, particularly for expensive graduate school programs. An estimated $1 trillion in student loans have been given to date. Many are in default.
As college tuition rates skyrocket, new research from the Federal Reserve Bank of New York also reveals that Americans aged 60 or older hold about $36 billion of these student loans as guarantors or co-signers, 10% of which are delinquent.
For all of them, student loan wage garnishment is a real possibility in the event of default.
Ascertain the Type of Loan
Private student loans are those that are NOT federally-sponsored or insured. The loan terms, including expansive conditions for default, are crafted by the lender and inserted within the four corners of the lending agreement. When the loan includes both student and co-signer (usually parents or grandparents), all are bound by the provisions of the agreement.
Grounds for Default
The primary reason that student loans go into default is the failure to make timely monthly payments.
Though agreements vary between lenders, most private student loans consider that missing a single loan payment constitutes a default. An opportunity to cure (make up the late payment) of 30 to 90 days may be extended, but some lenders are much more strict than others.
This is in sharp contrast to federal student loans. For those, it takes nine months of non-payment, or 270 days, to trigger a legal default that could lead to a wage garnishment being issued.
What many borrowers don’t see coming are other grounds for default in private student loans, such as the death or bankruptcy of one of the co-signers. These defaults can be activated – including wage garnishment proceedings – even if all loan payments from day one have been made on time.
Unlike federal student loans, a private lender must proceed by filing a complaint on the defaulted student loan in federal or state court. That means typically the borrower will receive personal service of the summons and complaint, with an opportunity to answer, raise defenses, and appear in Court.
The worst thing to do is ignore it, as a default judgment will then be entered for the full amount of the unpaid loan, interest, attorney’s fees, and costs. By answering and showing up at court hearings, an opportunity to work out a settlement or payment arrangement may be procured.
If all efforts at resolution fail, a court Judgment will nonetheless be entered. It is on this Judgment that the Court may then issue an order to garnish the borrower’s and/or co-signer’s wages.
Because of the vast number of student loans in default today, it is not uncommon for the social security checks of parent and grandparent co-signers to be garnished. In other words, no one can rest easy.
Federal Law Limitations on Garnishment
The Consumer Credit Protection Act (“CCPA") protects all borrowers in all states from wage garnishments that seek more than 25% of the debtor-employees disposable income, or all income up to 30 times the minimum wage.
State Law Garnishment Limitations
Meanwhile, every state has the right to regulate permissible wage garnishments. Many states limit wage garnishments to 25% of “disposable income," similar to federal law. Others drop it to 15% and protect wages of the head of household or family. Still others, such as Texas, bar any wage garnishments except for child support and taxes.
Direct Loan Consolidation
Federal law allows borrowers of federal student loans to consolidate multiple loans into a single loan and make one monthly payment based on income, expenses and ability to pay. That option does not exist for private student loans.
Loan Forgiveness is available for certain federal loans for qualified borrowers to hold extended employment in public service and consistently make timely payments for an extended time. These too are not available for private student loans.
Without proof of extreme hardship, student loans are not dischargeable in bankruptcy, so as to avoid wage garnishment.
Statute of Limitations
The statute of limitations is a law that bars an otherwise valid legal claim when the claimant has waited too long to file. Though there is no statute of limitations for collection of unpaid federal student loans, actions based on default of a private student loan is subject to the applicate state statute of limitations for written loan agreements. This defense must be asserted when the complaint is filed, not post-judgment at the garnishment level.
Needless to say, defaulting on a student loan or series of student loans is serious and complicated business. Contacting the new federal agency charged with overseeing student loans, the Consumer Financial Protection Bureau (CFPB), is always a good idea. www.consumerfinance.gov/students/repay.
Federal Statute: Title III, Consumer Credit Protection Act (CCPA), 15 USC, §§1671 et seq.
Code of Federal Regulations: 29 CFR Part 870
Explanatory Brochures and Regulatory Materials Online: www.dol.gov/whd
U.S. Wage and Hour Division: Fact Sheet #30 – The Federal Wage Garnishment Law, Consumer Credit Protection Act’s Title III (CCPA)
Field Operations Handbook – 02/09/2001, Rev. 644, Chapter 16, Title III – Consumer Credit Protection Act (Wage Garnishment)
CFPB website: www.consumerfinance.gov/students.
Direct Consolidation Loans: http://loanconsolidation.ed.gov/index.html.
Garnishment Fact Sheet: http://www.dol.gov/whd/regs/compliance/whdfs30.pdf