Students loans can really help to fund your education. But what about repaying them back? If you find it difficult to pay back your loans, tried for deferment and forbearance and didn’t qualify for it, tried different repayment plans but couldn’t afford one which will actually help, then this article is for you.
When you don’t repay the student loan, the loan amount will still continue to grow and the interest will also accrue. The creditor at this point will keep calling and reminding you about the payments. After 270 days of non-repayment, the Government will declare your loans as defaulted.
When you’ve defaulted on your loans, the whole amount will be due immediately. Also, it’ll be alerted to all credit bureaus which will ruin your credit score.
If immediate action is not taken by the borrower, the lender or the Federal Government can contact your employer and garnish your wages.
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Table of Contents
What is wage garnishment?
Wage Garnishment happens when your lender contacts your employer and ask them to deduct a certain amount from your earnings to pay off your debts.
It is an involuntary student loan payment and can really hamper your financial position.
Wage garnishment process for federal student loans
The lenders will first sue you in court. A letter will be sent to let you know that the garnishment will start. It can easily be initiated as compared to private loans as they don’t need any legal judgment.
You can request for a hearing within 30 days to postpone the garnishment. On successful hearing, it can be removed for 12 months or can be reduced up to a certain amount.
The hearing can be successful and the garnishment can be removed/reduced if you put forth the following points -
Financial hardship - The garnishment will hamper your financial position, so make sure to provide the necessary documents relating to your finances as proof that you’re going through a financial hardship and it won’t be possible to make payments at this point.
Employment - It’s been only 12 months you’re at your current job and as you were involuntarily removed from your previous job.
Bankruptcy - Recently you’ve filed for bankruptcy or your loan already was addressed in bankruptcy.
No default - You’ve already repaid, on current and in a repayment program with your loan servicer, so there is no loan for you to default on. This can mean that you’ve been mistaken for someone else who owes the money because of an error.
Identity theft - Someone uses your personal details to acquire the loan.
How much of the wage is subject to garnishment?
Your wages would be subjected to a 15% reduction in disposable income. Disposable income is the income after deducting the taxes and other payments.
A law under the Federal Student Loan Wage Garnishment says that you can’t be left with 30 times less than the Federal Minimum Hourly wage per week so those with less income have the option of less than 15% of their disposable income to be garnished.
Also keep in mind that co-signers or parents are also subject to wash garnishment so, if you default on your loans, they might also be affected.
Wage garnishment process for private student loans
If you have a private student loan and you have defaulted on it, you will also be sued in the court. But it can only be initiated if the debt collector gets the legal judgment to start garnishing your wages. This is a benefit that the private loan holders enjoy.
How much of the wage is subjected to garnishment?
State laws usually differ from one another but most of the states follow the same rules as applied for Federal loans, i.e. the wages are garnished at 15% of the disposable income (Total Income - Taxes and other payments).
How to avoid student loan wage garnishment?
1 - Make payments consistently and on time - Set up an automatic payment system to prevent the hassle of manually making payments every month. Also, keep reminders about the various due dates, especially if you have to repay more than one loan.
2 - Create an emergency fund - Save up money and put aside an emergency fund to help save you in unexpected situations.
3 - Set up a budget and follow it - Prepare a budget which includes all the sources of incomes and expenses that you incur on a monthly basis. Also, include your debt payments to stay on track.
4 - Select a good repayment plan - A good repayment plan will definitely come in handy when you are running low on funds. An Income-driven Repayment Plan is one of them. It allows you to make payments on the percentage of your discretionary income and also extends your repayment term, hence reducing your monthly payments.
5 - Apply for deferment or forbearance - It is quite understandable to have financial issues because of reasons like losing your job, medical emergency or some other economic destitution. Instead of not making payments and letting your loans default, you can apply for deferment or forbearance to delay your payments until you have enough funds.
How to stop wage garnishment?
If you are already charged for wage garnishment, you can still keep it under control and maintain your paycheck. The following are some of the measures to stop the process.
1 - Find ways to appeal - After receiving a notice from the Department of Education (DOE) that they are planning to garnish your loans make sure to read the letter thoroughly, understand it and confirm if it is legit and the debt is accurate. Call the lender, put forth an agreement on the various repayment options and if necessary, get help from a lawyer or a counselor.
2 - Win the hearing - Some points as discussed above, allows you to win your hearing and remove the garnishment on your loans. These points include proving that you haven’t defaulted and it was some kind of error, financial hardship, bankruptcy, and more.
3 - Consolidate your loans - Consolidation process usually takes 60-90 days, so make sure to do it as soon as you got your wage garnishment notice. It allows you to combine all your defaulted federal loans into a Direct Consolidation Loan which will have lower monthly payments and good standing.
You are required to use an income-driven Repayment Plan when consolidating default loans like Pay As You Earn Repayment Plan, Income-Based Repayment Plan, and Income-Contingent Repayment Plan.
These will lower your monthly payments and extend your repayment period which will give you enough time to get back on your feet and rebuild your credit.
4 - Rehabilitate your loans - This program allows you to make timely payments for 10 months and stop wage garnishment after 5 successful payments. This option can be hard for those who have lower income as it requires you to make two monthly payments, i.e. the wage garnishment and the amount under rehabilitation. The rehabilitation amount can be as low as $5 a month depending on your income, so it won’t be that big of a deal.
5 - Pay off your debt - This option allows you to pay all the amount you owe by enrolling in a repayment plan that satisfies the lender. It assumes that you have enough money to pay off your debt but is not paying it for some reason.
This can also be a good method even if you don’t have enough funds as it will help maintain your credit score and get you out of debt faster. So try to use your savings or ask for help from your relatives to pay off the amount as soon as you can.
State laws relating to wage garnishment
Different rules apply relating to wage garnishment, depending on the type of private loan acquired by you. States like Pennsylvania, North and South Carolina, and Texas consider it illegal, so people are relieved from it here.
State laws are also more lenient as compared to Federal laws so you can use the difference between them to get an exemption on your Federal loans. You can discuss the application of the state law on your case.
What are your rights?
You have your own rights regarding your wages being garnished and it is important to be aware of them.
A legal notification has to be sent to you regarding your wage garnishment.
You can file a case if you are wrongfully accused.
Your social security and veteran benefits are not included in your income but can be seized once they are in your bank account.
If you have more than one garnishment then you might be fired from your job, or else your employer can't fire you.
If you think the garnishment will deter your financial position or if it is an error, then you can confront the court about it.
Consequences of Wage Garnishment
The consequences of Wage Garnishment can be severe and includes the following-
All the credit agencies will know about your loan default which will hamper your credit score and it will stay for up to 7 years.
A 'Treasury Offset' will be applied to your loans, which means that your tax returns will be held back. You might also find it difficult to get approval on a credit card, buy a house or car.
Real estate purchase is out of the picture.
Rebuilding your credit will take years.
Your academic transcript might be withheld until you repay back your loans which will lead to problems like not being able to apply for jobs.
Will Wage Garnishment be a problem with your employer?
You can be embarrassed about the situation you’re in and might find it awkward to face your employer as they will be receiving the letter from the Department of Education. But remember, you might not be the only one facing this and your employer must have gone through it before. Also, they are required to keep this information confidential.
You cannot get fired over this, but if you have more than one garnishments, then there is a possibility that you might but laws do differ from one state to another.
Your employer will definitely not be happy about this, but the worse he/she can do is judge you, which is not really your problem. You can just make sure that this doesn’t happen again and work on rebuilding your credit score.
How to avoid student loan default scams?
As we have seen above, there are chances of you getting a loan into default because of some error, or if someone stole your identity. In the same way, there are a lot of scammers trying to take advantage of students facing debt.
These people will try to manipulate you, make you believe that they’re experts in what they do. They’ll ask for a fee to help with your financial problems and promises to get you a better deal.
The result of these promises depends upon how good these people really are in what they do and also the standard of these types of companies varies greatly. There are some who will actually bring about satisfactory results while others will just take your money and make excuses instead of doing their job.
If you decide to actually get assistance from these firms, do your research properly and go for those which you can trust. Try getting expert opinion also.