Life as a fresh college grad can be tough – especially if you owe Uncle Sam a substantial amount in student loans. At such a crucial stage in your life – where you might be struggling to make ends meet and figuring out how to pay for college – the last thing you need is to get a wage garnishment notice from a collection agency. Luckily, there are some ways to stop student loan garnishment.
Understanding what student loan garnishment is, what effects it can have on your life, and how to get out of it, can help you avoid this financial landmine.
Continue reading to get a full grasp on the topic, or jump straight to the steps you can take to stop student loan garnishment.
What is Student Loan Wage Garnishment?
Student loan wage garnishment happens when, on the instructions of the collection agency and the judgment of the civil court, your employer withholds a certain portion of your wages to repay your federal student loans.
Wage garnishment is initiated after a borrower enters into student loan default by failing to make the required number of consecutive payments in a specified time period.
For creditors, wage garnishment is the last resort to extract payments from borrowers.
Under this rule, your employer is legally required to cut 15% of your discretionary income and forward the amount to the collection agency.
How Student Loan Wage Garnishment Works
Before moving on to discussing how to stop student loan garnishment, it’s crucial to understand how the process works so that you’re better equipped to handle the situation.
Here’s that process broken down into 3 phases:
- You default on your student loans – This is where things start to go downhill. If you’re not able to make repayments (or weren’t lucky enough to benefit from an “employer paying student loans” program) most federal loans default after 9 months of missed payments (heads up – Federal Perkins loans default immediately after missing a single payment).
- You receive a notice – After the loan servicer is unable to procure payments, they can transfer the debt to a collection agency. This agency will send a notice of wage garnishment (known as Notice of Intent to Garnish) along with relevant documents. At this point, your loan balance is due immediately. You can either make a repayment settlement with the collection agency, or contest the garnishment in a court hearing under a 30-day period.
- The wage garnishment starts – If you fail to act in the 30-day time period, your bank account will be tapped and your paycheck will start being garnished.
More than 1 million people default on their student loans, every year. Ideally, you don’t want to be included in this figure.
If it happens anyway, the sooner you evaluate your options and act after receiving the garnishment notice, the better.
The Dreaded Effects of Student Loan Wage Garnishment
Falling into the curse of student loan wage garnishment can have serious and negative consequences.
Here’s how it can affect your life:
1) It Eats Away at Your Paycheck
Student loan wage garnishment subtracts a substantial amount from your paycheck, leaving you with barely enough money to pay your bills.
If the collection agency is in contract with the US Government, you can lose either:
- 15% of your discretionary income
- 15% of the difference between your discretionary income and 30 times the minimum wage.
The collection agency will take the lesser of the two.
Agencies that are in contract with the Department of Education take 10% of the income.
2) It Destroys Your Credit Score
Going into loan default and having your wages garnished can leave a lasting impact on your credit score.
As a result, you’ll find it difficult to make large transactions, such as buying a house, and applying for credit cards, for up to 7 years, or more.
3) You Might Not Get Your Academic Documents
The effects of wage garnishment aren’t limited to your personal finances.
In some cases, when the student loan enters default, the educational institute may withhold the transcript and/or any other academic documents, until the matter is resolved.
4) You’ll End Up Paying More Than You Owe
Last, but not the least, if you don’t stop student loan garnishment, you could end up paying more than what you own to your creditor.
That’s because garnishment also includes the cost of collection fees and court fees, among others.
While it may sound like nightmare, it’s possible to stop student loan garnishment.
With a few steps, you can stop it from beginning in the first place (or get out from it, if you have no other option left).
Let’s dive in:
1. Evaluate Your Options
After receiving the wage garnishment notice from a collection agency, the first thing that you have to do is to evaluate your options.
Here are the main things to consider:
- Challenging the garnishment in court
- Negotiating with the creditor
- Filing a claim of exemption
- Consolidating your loans
- Requesting loan rehabilitation
After getting a rough idea of all your options, go through them one by one.
2. Object to the Garnishment in Court
The very first thing that you should do is to carefully analyze the garnishment notice and check for any possible mistakes.
If you find any error, you can stop the garnishment by filing an appeal.
You’ll receive information, along with relevant documents, on how to object to the garnishment.
You can object to student loan wage garnishment if:
- Information about your outstanding student loan in the notice is incorrect
- The collection agency is planning on garnishing more amount than permitted
- You were terminated by your previous employer, and it has been only 12 months since you joined your current employer
- Someone stole your identity and wrongfully took out loans
- You filed for bankruptcy
It’s advised to gather as much relevant information and proof as possible to build a strong case, and win the hearing. Having a lawyer by your side could make all the difference.
3. Negotiate with the Collection Agency
Debtors often underestimate the power of negotiation.
If you cannot object to the garnishment in any way, contact your collection agency or the Department of Education to negotiate a student loan debt settlement.
You’ll have to act quick, since you have 30 days to approach the collector and work out a settlement.
On top of that, you have to leave a good amount days for an alternative plan or two, in case negotiations don’t work out.
Legally speaking, collection agencies are authorized to offer the following settlement options to delinquents:
- Complete, lump-sum payment of the principal amount, accrued interest, and all other charges.
- Payment of the complete principal amount and 50% of the accrued interest (the rest is forgiven).
- Payment of 90% of the entire balance (including both the principal amount and the accrued interest).
Usually, debtors are required to repay the total amount in one, lump-sum payment, which is due after 90 days of the settlement.
In special cases, collectors will agree to receive payments in monthly installments. However, the total amount has to be repaid under a fiscal year.
Remember, you need all the student loan garnishment help you can get. If you hire a student loan lawyer, it can help reach a much better agreement with your collection agency.
4. File a Claim of Exemption
If the garnishment does, in fact, apply to you and you’re unable to work something out with your collection agency, you can consider filing a claim of exemption.
This option is open to you if the wage garnishment would result in financial hardship for you.
A claim of exemption is meant to protect all or a certain amount of your income from being garnished, so that you can cover your basic cost of living.
While the laws vary from state to state, generally, the following types of income cannot be garnished:
- Social security
- Child support
You can file a claim of exemption through a document that you should have received with the garnishment notice.
5. Avoid Garnishment by Consolidating Your Loans
Another promising way to avoid or stop student loan wage garnishment is to consolidate student loans i.e. combining different federal loans into one.
With Direct Loan Consolidation, you can remove the default status and avoid having your wage garnished.
In order for this to work, the garnishment must not have taken effect. If your wages are already being garnished, you cannot consolidate your loan.
To consolidate, follow these steps:
- Visit studentloans.gov and log in with your FSA ID.
- Click “Complete Consolidation Loan Application and Promissory Note.”
- In the application, select which loans you wish to consolidate.
- Choose the repayment plan of your choice.
An important thing to remember here is that it may take up to 30 days (or even more) for loans to get consolidated, so planning ahead is crucial.
6. Stop Student Loan Garnishment by Requesting Loan Rehabilitation
In case nothing has worked out for you, and you’ve fallen into the pit of wage garnishment, there’s still hope.
You can stop student loan garnishment by requesting loan rehabilitation with your loan holder.
Under a loan rehabilitation agreement, you get out of loan default by making 9 consecutive monthly payments in a period of 10 months.
After 5 payments, you can also work your way out of wage garnishment.
However, with this option, you’ll have to bear two payments in the first month – one for rehabilitation and the other for wage garnishment.
Receiving a wage garnishment notice from your collection agency – or having your wages garnished, for that matter – isn’t the end of the world.
To conclude, it’s possible to stop student loan garnishment if you know what you’re doing. All in all, it’s crucial that you exhaust all of the options before you accept the garnishment.