Americans owe more than $1.1 trillion in student loans. These loans have been made to nearly 50 million borrowers. According to the Wall Street Journal in 2015, seven million of these borrowers have not made a single payment on their student loans in over a year. Unfortunately, for many of these individuals, the prospect of suffering a student loan wage garnishment is no longer just a mere possibility; it is a harsh reality.
Wage garnishment refers to a process where a party who is owed a debt gets paid a portion of an employee’s income directly from their employer. Garnishments can occur for numerous types of debts, including delinquent student loans. The garnishment process and the garnishment limit depend on the type of loan and the state where the garnishment is taking place. Federal garnishment law is established through the Consumer Credit Protection Act (CCPA,) but state garnishment laws also apply and can significantly vary.
Types of Loans
Student loans come are generally one of two kinds: those guaranteed by the Federal Government (including Stafford and Perkins loans) and those from private lenders. However, due to the complexity of the student loan process, it can sometimes be difficult to determine if your loan is federal or private, as it’s not uncommon for the same lenders to be involved in both types of loans. One way to find out is to search the National Student Loan Data System, located at https://www.nslds.ed.gov/nslds_SA/. If your loan is listed here, it’s a federal loan. If not, it’s a privately-funded loan.
Student Loan Garnishment Process
The main difference between the garnishment of federal and private student loans is that the Federal Government can conduct what’s called an Administrative Wage Garnishment, meaning they don’t have to obtain a court order to begin the garnishment. Private lenders are required to have a court order to garnish wages.
The law requires that the lender exercise “due diligence" in collecting payments from you before filing for a wage garnishment, meaning you’ll likely receive numerous bills and/or phone calls prior to receiving a garnishment notice. Assuming that you don’t object to the notice, the notice will be forwarded to your employer, who is required by law to comply.
If your loan is a Federal loan, up to 10% of your disposable income can be garnished to repay your debt (this is what’s left after deductions required by law, such as taxes). The maximum they can take is 30 times the current minimum wage.
Private guarantors can garnish up to 25% of your disposable income under Federal law, again up to 30 times the current federal minimum wage.
When federal and state laws conflict, the law that favors the employee (i.e. resulting in the smaller garnishment) applies. Some state laws allow for up to 25% of disposable income to be garnished, while in two states (Texas and Pennsylvania) wages can’t be garnished at all for private student loans.
Stopping a Student Loan Wage Garnishment
Many former students who have allowed their student loans to go into default stick their head in the sand. They ignore the notices of default, refuse to take phone calls, and don’t take the initiative. Then one day you learn your wages have been garnished.
What do you do? First and foremost, drop everything you’re doing and focus on the situation at hand. If there is a repayment plan that you can live with based on your current income and budget, determine what that plan would be. Then immediately do one of two things: call your lender directly, or call the U.S. Department of Education’s Collection Services Information Center. This way you will learn your options.
Of course, if you have any amount of funds available to you, or that you can borrow, the quickest and easiest way to stop a student loan wage garnishment is to simply contact the creditor to pay the debt or make arrangements for a payment plan. This will depend of course on how much income is at your disposal. However, if this isn’t an option, you can file an objection to the garnishment based on financial hardship.
This requires completing a form (see the link in resources, below) and providing documentation of your income and expenses. In general, to get approved for a hardship exemption you’ll need to show that the wage garnishment would cause extreme financial distress for you and your family, such as causing you to be evicted or your home to be foreclosed on. You have 30 days from the date you receive the notice of garnishment to file this document. You’ll then be given a hearing where you can present evidence and testify.
You can also object to a wage garnishment in various other scenarios, including:
- If the loan doesn’t belong to you
- If you’ve recently begun making payments on the loan
- If the school or university owed you a refund which they didn’t provide
- If the loan documents were forged (it wasn’t actually you who signed them.)
But there is still at least one more option that may make your head spin, as to why you didn’t think of it before.
Loan Consolidation to Stop Student Loan Wage Garnishments
Remember this: the reason you are having your wages garnished in the first place is that you are in default on your student loans. In default is the magic phrase. And usually, you are seriously in default. Fortunately, there is something akin to a magic wand that is available to most borrows.
The magic wand to making your existing defaults disappear is the Direct Consolidation Loan program offered by the U.S. Department of Education. According to the U.S. Department of Education, “If you want to consolidate a defaulted loan, you must either make satisfactory repayment arrangements on the loan with your current loan servicer before you consolidate, or you must agree to repay your new Direct Consolidation Loan under the Income-Based Repayment Plan, Pay As You Earn Repayment Plan, or Income-Contingent Repayment Plan."
What this means in plain English is that you can get out of default by rolling all of your defaulted loans into a single new loan. As soon as you accomplish this, you can apply for a payment program based on your current ability to pay, taking into account reasonable and ordinary budgetary costs of an individual in your situation.
Student Loan Default Rehabilitation:
If your wages are not being garnished, and you have not yet received a notice of intent to levy or garnish your wages, but you are in default, there is something you can do right away for peace of mind: you can eliminate your student loan default, and thus the prospect of garnishment, by seeking to “rehabilitate" your federal loan.
One program is known as the FFEL or Direct Loan Rehabilitation. It does not apply to so-called Perkins loans. Perkins loans can also be rehabbed, but under very slightly different conditions. Both require you to make nine timely payments. FFEL lets you miss one month. Perkins does not.
If you successfully complete your rehabilitation, your default is wiped off the books. However, you do pay a cost. Most private lenders will add collection costs to the new unpaid balance, causing the unpaid balance to be more. Ever since July 2014, the collection costs have been capped at 16% of the unpaid principal and interest due on the loan. Though it has the right to change policies, the U.S. Department of Education currently does not tack on collection costs.
Rehabilitation is available on once, so use this mulligan, as it were, wisely.
Bankruptcy as a Remedy to Stay Wage Garnishment for Default of Your Student Loan
There is a common belief that bankruptcy is not a remedy for escaping student loan debt and any wage garnishment resulting therefrom. This belief is false. First, bankruptcy can be used to discharge most all other debts except past due taxes, and it will stay (at least temporarily) all wage garnishments.
Second, once you have done this, at the least you will either be able to pay your student loans since much of your income will be freed up, or you will be able to enter into a realistic repayment plan with your lender. However, there are now many situations where you can actually discharge all or part of your student loan debt as well.
Though the details of discharging your student loan debt in bankruptcy are beyond the scope of this article, suffice it to say that opportunities might exist for discharge under a theory of hardship. See the following article for a variety of links that might fit your particular situation: getoutofdebt.org/90047/department-of-education-reaches-decision-about-student-loans-and-bankruptcy
Accordingly, for obvious reasons, questions about Consolidation, Rehabilitation, student loan wage garnishments generally should be handled by a qualified attorney who is familiar with wage garnishment law both federally and in your state, as well as bankruptcy.
Federal Student Aid, Administrative Wage Garnishment: ifap.ed.gov/ifap/index.jsp
U.S. Department of Education Student Financial Aid website: federalstudentaid.ed.gov/
Student Assistance: Studentloanborrowerassistance.org/
Student Loan Defaults: brookings.edu