April 2, 2018

Student Loan Wage Garnishment

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Student loan debt can be one of the most crushing types of debt you carry. You cannot get rid of it, not even in a bankruptcy. It follows you for the rest of your life. It can even put your wages at risk of garnishment.

Wage Garnishment

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Wage garnishment isn't the first thing the U.S. government does if you don't pay your student loans, but they don't wait too long to start the process. In other words, don't take your time figuring out what to do. If you cannot make your student loan payments, get in touch with your loan servicer right away. The sooner you have the conversation, the more options you'll have at your disposal.

A defaulted loan in the eyes of the government is one that goes unpaid for 270 days. That's 9 months.

We don't recommend you allow it to get to that point. Again, contacting your loan servicer may give you options, such as deferment or forbearance. While they are not the best options, no one can garnish your wages while you are in these programs.

If you do get to that 270-day mark, brace yourself. Your entire loan balance plus accrued interest is due now. It's called acceleration. If you are like the average borrower, that means around $37,000 in just principal is due right away. You'll also owe the accrued interest. Chances are, if you defaulted that long, you don't have that kind of money lying around.

Keep reading to see what you can do to get yourself out of this situation.

What Is Considered Student Loan Default?

Remember those deferment and forbearance options we discussed above? Those go away if your loan is in default. You also lose any loan repayment options.

Your loan ends up with a collection agency, which means even more fees. The thousands of dollars in principal plus interest just got higher. Collection agencies can charge anywhere from 18% to 40% of your principal plus interest balance.

The Department of Education allows collection agencies to charge this fee. This way, the DOE receives full repayment of the money you owe. On an average $37,000 student loan debt, you could pay between an extra $6,600 and $14,800 in fees.

What Happens with the Collection Agency?

Once your loan(s) are with a collection agency, you deal with them directly. Typically, they will offer you the option of a payment agreement first. If you choose this option, you could prevent wage garnishment. But, you have to stay current with your payments. If you decline the agreement or don't pay as agreed, the collection agency moves on to the next step. This usually means wage garnishment or Treasury offset.

Treasury offset is the withholding of any money you would normally receive from the federal government. Income tax refunds and Social Security payments are the most common.

The federal government will let you know of the intent to offset your federal income 65 days before it starts. The offset will continue until your debt is paid in full. Your own recourse is to request a review of the account. If you do this, the government must review the case prior to keeping any of the funds. If the review is overturned, though, your funds will again be offset.

If your Social Security income is due to a disability and you have medical proof that you are totally disabled, you may be able to avoid the offset. However, if the income is ever reverted to strictly retirement income, the offset can occur again.

If you don't have federal income to offset, the collection agency will likely garnish your wages. This means up to 15% of your disposable income may be withheld from your paycheck. The lender does not need to take you to court to have this benefit. It may continue until the debt is paid off, too. The only recourse you have in this case is to bring the loan back to current. Once it is out of default, the garnishment can stop.

If the collection agency cannot garnish your wages because you are self-employed, the U.S. Department of Education may take legal action against you with the U.S. Department of Justice. This could result in a lawsuit and thousands of dollars in legal fees.

You are given 30 days by law to fix the problem. You can contest the garnishment or enter into voluntary repayment, which we discuss below. You can also request a hearing to voice your opinion regarding the debt. This is your chance to explain why you think garnishment should not occur.

The easiest way to stop garnishment in its tracks, though, is to create a repayment plan. This must be an official plan created with the Department of Education or the collection agency holding your loan. Get the agreement in writing and make your first payment within 30 days of receiving the notice of wage garnishment. This could temporarily stop wage garnishment. However, if you stop making those agreed upon payments, your account goes right back to wage garnishment.

Dealing with a Loan in Default

If you end up in default, you have to act quickly if you don't want any of the above consequences. As soon as you receive the notice of default, you have one of three choices:

  • Pay the balance, including accrued interest and collection agency fees, if applicable, in full
  • Agree to a loan rehabilitation
  • Agree to a loan consolidation

Paying the balance in full is the least likely option here. If you had the money, you wouldn't be in default in the first place. That leaves us with loan rehabilitation and loan consolidation.

Loan rehabilitation is an agreement with your lender regarding the minimum payment you must make each month. They base your payment amount on 15% of your monthly discretionary income.

You can calculate your discretionary income by taking your adjusted gross income and subtracting 150% of the poverty guideline amount. This amount varies based on your location and family size. Any income that you make beyond the 150% benchmark is used to calculate your repayment amount. If you can afford 15% of this amount, you can agree to the loan rehabilitation.

Along with the amount, you must agree to make nine consecutive payments starting right away. Each payment must be made within 20 days of the due date. In addition, all payments must be made within a 10-month period to qualify.

The loan rehabilitation program still allows you to enter into forbearance or deferment if necessary. You are also eligible for any loan forgiveness plans, such as the Public Service Loan Forgiveness. You may even have the record of default removed from your credit report.

Even though the record of default may be removed from your credit report, the late payments will remain on the report. They will remain there for 7 years.

You also have the option to consolidate your defaulted loans into a Federal Direct Consolidation Loan. In order to consolidate your loans, you will need to agree to a new payment arrangement. Your loan servicer will base it on one of the available Income-Driven Repayment plans. If you would rather, you can also choose to make three on-time payments on the defaulted loan. Your loan servicer determines the amount you must pay. It must be a payment that you can comfortably afford.

Consolidated federal loans are eligible for deferment and forbearance. You may also use the payments to help you qualify for any Loan Forgiveness Programs. Keep in mind, though, the record of default will not be erased from your credit report with loan consolidation. It remains there for the next seven years.

You may be eligible to re-consolidate an already consolidated loan if you add another loan into the consolidation. You must also meet one of the above requirements (agree to an Income-Drive Repayment Plan or make three payments on the defaulted loan). If you defaulted on a consolidated loan and you don't have any other eligible loans to add to it, you may not re-consolidate the loan.

Avoiding Wage Garnishment Altogether

In a perfect world, your student loans would never get to the point of wage garnishment. Luckily, there are steps you can take to make this a reality. The common denominator in any situation, though, is you have to ask for help. Your loan servicer doesn't want to send your loan to collections. They would rather collect the payment from you. This is why they offer both of the following options:

  • Income-Driven Repayment Plans: You can obtain a longer term and/or lower payments with an Income-Drive Repayment Plan. The government has many options, all of which depend on your discretionary income. While you may pay more interest over the life of the loan by dragging it out, it beats wage garnishment and having a defaulted federal loan on your credit report.

  • Deferment or forbearance: If you've fallen upon troubled financial times, you may just need your payments to stop. While it's not a permanent solution, it can help during troubled times. A loss of a job or a medical emergency are two common situations when taking a temporary break from your payments may be beneficial.

Both of these situations help keep your loan out of default and you away from the risk of wage garnishment.

Your student loans are nothing to ignore, though. The key is to act quickly. If you know you are having trouble, talk to your loan servicer right away. The more communication you have, the better your chances of finding a proper solution.

Bottom Line

Student loans are your responsibility for the duration of the loan. No matter how much financial trouble you get into, the loans never go away.

Rather than ignoring their existence and risking wage garnishment, get in contact with your loan servicer right away. The quicker you come up with a solution; the better off you'll be in the end.

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