Federal student loan defaults now face wage garnishment again: Steps you can take

Resumption of Wage Garnishment for Federal Student Loan Defaulters

Starting this month, individuals with federal student loans who have fallen into default may once again face wage garnishment, as the Trump administration reinstates involuntary debt collection measures after a prolonged suspension.

Wage garnishment allows the government to take up to 15% of a borrower's disposable income after taxes, but this only affects those whose federal student loans are in default. Default status is reached when payments are overdue by at least 270 days.

According to data from the American Enterprise Institute (AEI), approximately 5.5 million borrowers are currently in default, many of whom defaulted before the pandemic. An additional 6 million borrowers are behind on payments and at significant risk of default, AEI reports.

Betsy Mayotte, who leads The Institute of Student Loan Advisors (TISLA), warns that the nation could soon see a record surge in student loan defaults, with millions more borrowers at risk.

In response, the Biden administration enrolled nearly 7 million more borrowers in the Saving on a Valuable Education (SAVE) repayment plan, which placed these loans in administrative forbearance as of July 2024, temporarily halting payments.

However, the SAVE plan was quickly challenged in court by several Republican-led states and was ultimately terminated following a legal settlement in December. As a result, affected borrowers must transition to other federal repayment plans, which are likely to require higher monthly payments.

“I’m genuinely concerned that we’ll see a dramatic rise in defaults,” Mayotte commented.

As the Department of Education intensifies its collection efforts, Mayotte points out that wage garnishment is not a new practice. The agency is legally obligated to recover outstanding federal debts on behalf of taxpayers.

Understanding Wage Garnishment Procedures

Before wage garnishment begins, defaulted loans are transferred from the loan servicer to the Education Department’s Default Resolution Group (DRG). Borrowers are then sent a written notice to their last recorded address, informing them that wage garnishment will start in 65 days unless action is taken.

It is the borrower’s employer who deducts the specified amount from each paycheck and forwards it to the government, as outlined by the Office of Federal Student Aid (FSA).

Financial aid expert Mark Kantrowitz explains that when the Department of Education garnishes wages, borrowers must still receive at least 30 times the federal minimum wage per week (currently $217.50), ensuring the garnishment does not exceed 15% of disposable pay.

Other Government Collection Methods

The government has additional ways to collect on defaulted student loans beyond wage garnishment.

• Your federal income tax refund can be seized to pay down your debt.
• If you receive Social Security disability or retirement benefits, up to 15% of those benefits may be withheld, though at least $750 per month must remain.

Defaulting on student loans can also severely damage your credit. Negative marks are reported to major credit bureaus and can stay on your credit report for up to seven years from the date of default, which can make it harder to qualify for credit cards, car loans, or mortgages.

Steps to Take If You’re in Default (and How to Prevent It)

If you receive a notice that your wages will be garnished, your options to resolve the situation are limited. You can:

• Pay off your loans in full
• Consolidate your loans into a federal Direct Consolidation Loan
• Enter loan rehabilitation, which involves making nine consecutive, timely, and affordable payments based on your current income to remove the default status

You may also request a hearing to contest the default, particularly if garnishment would cause severe financial hardship or if you have been employed for less than a year following an involuntary job loss, according to the FSA.

Borrowers in default can incur collection fees as high as 24% of the outstanding loan balance. Successfully rehabilitating a loan reduces these costs to 15%, while consolidation lowers them to 18%, according to Mayotte.

To avoid default, contact your loan servicer immediately if you’re struggling to make payments. For many, enrolling in an income-driven repayment (IDR) plan is a better alternative than facing wage garnishment, Kantrowitz advises.

“Income-driven repayment typically requires payments of 10% or 15% of your discretionary income, which is your adjusted gross income minus 150% of the poverty line,” he explains, noting that AGI is often less than your disposable income.

Kantrowitz also points out that the Education Department has lost contact with over half of federal student loan borrowers due to outdated information, meaning many may not even realize they are in default.

To prevent unexpected issues, ensure your contact details are current on studentaid.gov and with your loan servicer, Kantrowitz recommends.

If your current payments are unaffordable or you need to switch from the SAVE plan, you can use the FSA’s Loan Simulator tool to estimate payments under different plans.