Understanding Student Loan Wage Garnishment: Can You Stop It?

You may have heard threats of student loan wage garnishment before. The phrase may conjure images of a scary loan collector, taking money out of your biweekly or monthly paycheck until there are only a few dollars left. This can be especially frightening for recent graduates who struggle to find steady or well-paying employment, or those considering graduate school with several student loans from undergrad left to pay.

The good news is that no lender can simply start taking money out of your paychecks without you knowing. If you work with the lender to manage payments, including during situations of financial hardship, you are unlikely to experience student loan wage garnishment.

If you stop making payments on your student loan (for any reason), you struggle with chronic unemployment, you barely have enough money to pay your regular monthly bills, or you have moved and are no longer getting notices to pay, your creditors may send your loan into default. A collections agency will then be responsible for obtaining payment from you. 

Federal & Private Student Loan Wage Garnishment Operates Under Different Laws

If you default, both federal and private student loans can choose student loan wage garnishment as an option to force repayment on the loan. But the process is different for each type of entity.

Federal student loans are not considered in default unless you miss monthly payments for nine months. Sending the loan to a collections agency and forcing payment takes months longer than that. With more than a year to accomplish this process, you have time to check with your student loan company and discuss your recourse.

However, the federal government is authorized to take 15% of your paycheck if you fall into default and do not contact your lending agency or school to work on recourse options. This is called administrative wage garnishment (AWG).

If you have taken out private student loans, the garnishment process is a bit more complicated. Collection agencies have to go through a lengthy process before they can garnish your wages, but if you do not take steps to stop student loan wage garnishment, they can take money out of your paycheck.

For a loan to become a wage garnishment, collectors must:

• Bring legal action against you.
• Successfully win a judgment against you in court.
• The judgment must authorize the lender to contact your employer.
• The lender will determine how much they will ask for from your paycheck.

Wage garnishment is one way for collections agencies to get money if you default on your private student loans, and the specific rules governing collections will vary by state.

If you fail to stop the process, the private lender can take more than 15% of your paycheck, depending on their loan terms. You are also less likely to have options to stop the student loan wage garnishment process. Because this is a private loan, even if it was designed to help pay for your college education, it will be treated no differently than defaulted credit card debt.

Stopping Student Loan Wage Garnishment: Private vs. Federal Loans

With private loans, there are a few ways to stop wage garnishment. 

• Some states have a statute of limitations on garnishment, and some have laws against wage garnishment altogether. Get in touch with a lawyer.
• Pay attention to notices from your loan company or any collections agencies. You can contact them to work out a payment plan rather than having your wages garnished.
• Attend any court dates that are set, as judges are unlikely to allow wage garnishment for student loans if you agree to a payment plan.

You may consider working with an attorney if you are concerned about student loan wage garnishment, especially if you have private student loans that are in default. For federal student loans, you have three options to manage your defaulted student loans before the government garnishes your wages. 

1. Consolidate your loans. If you have missed payments on your federal student loans, you have some time to combine them with a direct consolidation loan through the Department of Education. To consolidate your federal loans into one loan, you must contact your school, loan provider, or the Department of Education and either:
   • Agree to a repayment plan created by the direct consolidation loan, using income-driven repayment.
   • Make three voluntary, consecutive, on-time, and full monthly payments on the defaulted loan prior to consolidation.The government understands that you may struggle with money or employment after graduation, even after the loan’s repayment grace period of six months, so they are willing to work with you if you need to adjust to an income-driven plan. This is far better than falling into default.
     
     Once your loan has been consolidated and payments begin, default status will be removed, so you can take advantage of deferment or forgiveness programs if those work for your situation. However, this will not remove the “default” status from your credit report.
     
2. Rehabilitate loans. Most people who default on their federal student loans work with loan rehabilitation.
   
   The first step is to contact your student loan holder and ask about this process. Lenders that provide federal student loans understand that you, as a recent graduate, may experience more financial instability than you anticipated, so they will work with you to determine reasonable monthly payments. These will likely equal about 15% of your discretionary income.
   
   This is similar to what would be garnished from your wages, but you will be part of the rehabilitation process, while federal student loan wage garnishment occurs without your consent.
   
   Discretionary income is the amount of adjusted gross income that exceeds 150% of the federal poverty guideline amount for your state and your family size.
   
   You must provide this documentation to your loan holder so they can determine payments. If the amount calculated by the lender is not an amount you can afford, you can ask for an alternative monthly payment based on what remains of your income after you have paid personal expenses like rent/mortgage, childcare, and bills.
   
   You will have to provide documentation of these expenses on a specific form. Going through this process means you can get a reasonable loan repayment plan that works for your financial situation.
   
   Once your loan is rehabilitated, the default status will be removed, which will help your credit score. This allows you access to other options to manage your loan, including deferment, forbearance, forgiveness, and cancellation. If you want to go back to school, you will be eligible for federal student aid again.
   
3. Pay in full. If you have defaulted on your loan for reasons that have nothing to do with financial instability, you can repay the loan in full rather than go through the rehabilitation or consolidation processes. This is rare, but if it is an option for you, you can unburden yourself from student loan debt and focus on your career. 

Most instances of default on student loans are due to financial hardship. While private loans may require different tactics, the government is often understanding of financial instability and can help you manage your loan payments.