If you are struggling with making your student loan payments, you are not alone. Student loan debt has been ballooning over the past several years, and about 10% of all borrowers are more than 90 days delinquent.
If you haven’t been making your payments, it’s likely because you can’t spare the funds to do so. If that’s the case, the idea that funds could be taken from your wages or your bank account can be very frightening.
However, there is a very long path between missing a payment and ending up with “wage garnishment” or a bank levy, and there are many chances for redemption along the way.
Delinquency and Default
Your loan becomes delinquent on the first day you miss a payment, and it will remain delinquent until you make the payment or make other arrangements.
For federal loans, credit bureaus are notified after 90 days of delinquency. Private lenders may report delinquency as early as 30 days. This can make it difficult to get credit elsewhere or result in higher interest rates on future sources of credit or loans.
Direct Loans and FFEL Loans graduate from delinquency to default if you miss a payment for 270 days. Lenders typically wait until the end of a 90-day period to file a default claim, which means you may, in actuality, have 360 days after a missed payment before entering default. Private student loans are in default after 120 days of delinquency.
When you default, the full balance and all fees and unpaid interest are due immediately. For federal loans, you lose your eligibility for programs like forbearance or other payment arrangements and you can no longer get federal student aid.
In addition, collections fees may be tacked onto the balance. The amount of these fees vary by loan but are as much as 25% for FFEL and Federal Direct Loans.
What Is Garnishment?
Garnishment occurs when a creditor takes money from your paycheck, bank account, tax refund, or other federal benefits. (Technically, when money is taken from an account as opposed to a paycheck, it is called a levy.)
Once your loan is in default, creditors have the right to go to court in an effort to get the money you owe them. If you refuse to pay them directly, that money can be taken from you. Wage garnishment is the most common, but, if that fails, you may have your bank accounts frozen as money is transferred.
Are There Any Exceptions to Wage Garnishment?
There are limits to how much can be garnished, as well as limits on what funds can be taken.
Some funds that are typically exempt from garnishment include the following:
- Social Security and SSI benefits
- Veterans’ benefits
- Disability benefits
- Certain retirement benefits, including federal and civil service retirement, railroad retirement, and foreign service retirement
- FEMA disaster assistance
However, if you have defaulted on federal student loans, even the funds listed above may not be safe.
Wage garnishment is typically limited to the lesser of 25% of your disposable earnings or the difference between your disposable earnings and 30 times the federal minimum wage.
If you have defaulted on a federal loan, then 15% of your disposable earnings may be garnished.
Federal Student Loans vs. Private Loans
How the process of garnishment is initiated depends on whether your student loans were federal or private.
If you default on a private loan, the lender is required to go to court, prove that you are in default and that they have made every effort to get you to pay, and get issued a court order before they can take money from your wages or bank accounts.
If you default on a federal loan, however, there is no court order requirement. It’s worth noting that, in the event of a federal loan default, nothing is likely to happen until a full year after your first missed payment – you will have received several notifications and attempts at remedy beforehand. They also tend to garnish wages before trying to freeze assets and bank accounts (in fact, the latter almost never happens except in extreme cases).
Unlike private lenders, the federal government can enact a treasury offset, in which they take what they are owed from your tax refund, Social Security payments, or other monies paid to you by the U.S. Department of the Treasury.
How Will I Know If I’m Going to Be Garnished?
If your wages are garnished, the notice is actually sent to your employer. They are notified that your wages are to be garnished and that they are legally required to send the appropriate portion of your wages to the collections agency. You should be aware that this is happening well in advance, however, because you will have been notified about the preceding court case and given time to contest it.
For federal student loans (for which no court order is required), you will be notified in writing at least 30 days before garnishment begins and be informed of the amount you owe and how to request records or a hearing.
The same applies to bank levies. You will either receive notice from the government or you will be made aware of the court case brought against you beforehand.
What Can I Do If My Wages Are Garnished?
The best way to deal with a levy or garnishment is to avoid it in the first place. (Details on how to do so are in the next section.) If you do end up in the position where a garnishment is in place and money is scheduled to be taken from you, there are still actions you can take.
- Dispute the garnishment: If you believe the amount they are trying to take is incorrect or you weren’t given proper notice, you can go to court to dispute it. Depending on laws in your state, you may even be able to get the garnishment lifted or reduced if you can prove financial hardship.
- File bankruptcy: While filing bankruptcy won’t necessarily free you from student loan debt, it can put the collections process on hold while you sort out your finances and make arrangements.
- Contact the collections agency or creditor: You may still be able to make contact and attempt to negotiate a payment plan or a debt settlement.
- Provide proof that funds are protected: As mentioned previously, certain funds are exempt from garnishment or levy. If you can prove these are the funds in your bank account, then you might be able to keep them safe.
Other grounds for dispute is if the statute of limitations has expired. For private loans, this limit is typically about six years, but it varies from state to state. Federal loans, however, do not have any such limitations.
How to Avoid Defaulting on Your Student Loans
If you are facing financial difficulties and are unable to make a student loan payment as a result, the best thing you can do is contact your loan servicer immediately and let them know. There are many options in place for handling such situations, especially if the loan is from the U.S. Department of Education.
Depending on your situation or degree of financial hardship, any or all of the following might be possible:
- Forbearance: A temporary period of time where you do not need to make any payments. Your loan account remains current, your credit remains in good standing, and you can get back on track once your finances are more secure.
- Deferment: If you are attending school or are in the military, you might be able to apply for loan deferment. This is similar to forbearance in that it allows a period of time during which you do not need to make payments, but you do not need to prove financial hardship to qualify.
- Rate reduction programs: Some services provide rate reduction programs where those at risk for default can apply to make payments at a much lower interest rate for a short period of time.
- Change your payment plan: You may be able to reduce your monthly payments by extending the term of your loan, changing to an income-contingent plan, or using a graduated payment plan.
- Refinance: You might be able to lower your monthly payments by consolidating or refinancing your loan at a lower rate.
Getting Ahead of the Game
As the saying goes, “An ounce of prevention is worth a pound of cure.” The best way to prevent garnishment or bank levy is to not go into default in the first place. In fact, this doesn’t just benefit you – your lender likely prefers working something out with you, instead.
Whether you’re already in delinquency, default, or just anticipating the worst, our team of experts at CollegeFinance has your back. To learn more about the consequences of not paying your loans as well as other related topics, check out our most recent guides and articles available online today.