You can stop a student loan garnishment for a defaulted loan after it starts by either:
- Negotiating a settlement
- Entering into a loan rehabilitation program
- Requesting a financial hardship reduction
- Filing bankruptcy
Of the four, settlement and bankruptcy are the only two that will stop the student loan wage garnishment immediately.
Negotiating a student loan settlement stops it because you’ll be paying off your student loan debt.
Bankruptcy works because both chapter 7 bankruptcy and chapter 13 bankruptcy stop wage garnishment as soon as you file your case.
The other two, student loan rehabilitation and a financial hardship reduction, take a few months to stop wage garnishment.
Notice that I didn’t mention loan consolidation as a way to stop a wage garnishment.
You can’t consolidate your loans after a federal student loan wage garnishment notice is sent to your job.
COVID-19 and federal student loans
The US Department of Education has suspended collections for most federal student loan borrowers.
The suspension lasts from March 13, 2020, until September 30, 2020. You qualify for the suspension if the Department of Education owns your federal loan.
The suspension does not apply to any private student loan you may owe.
The Department of Education has said it is refunding garnishment money taken from borrowers’ paychecks after March 13.
Contact the debt collector that has your loans for more information.
How student loan wage garnishment works
After you default on student loan debt, your lender will try and collect a portion of your pay from you.
With a private loan, a private lender has to sue you and win the lawsuit before it can send a wage garnishment order to your employer.
And once that happens, the only way to end wage garnishment for a private loan is to negotiate a settlement or file bankruptcy.
Federal student loan debt is different.
The government can send a wage garnishment order to your employer without first suing you and getting a court order.
The government has this power because Congress gave it the right to collect student loan debt using an administrative wage garnishment order.
The government’s power to send a wage garnishment notice to your employer is triggered after you default on a federal loan.
Once that happens, the wage garnishment order allows for 15% of your wages to be garnished for that set of federal student loans.
Suppose you happen to have another set of federal student loans in default. In that case, a second wage garnishment order can be sent to your employer. That wage garnishment order will allow another 10% of your wages to be garnished.
You can have a federal student loan garnishment, a tax refund offset, and a Social Security offset at the same time. If you’re expecting a large tax refund, wait until you get your loans out of default before filing your tax return.
How the loan rehabilitation program works
The student loan rehabilitation program requires you agree to a repayment plan whereby you’ll make 9 monthly payments.
After your ninth payment, your defaulted federal student loan will be brought back into good standing. And when that happens, your federal student loan will again be eligible for:
- student loan forgiveness
- forbearance, and
- student loan payment plans based on your income.
One other key benefit of the program is that it will suspend wage garnishment after you make your fifth monthly payment. This means you’ll make 5 monthly payments on top of the 5 months of wage garnishment before the garnishment stops.
The exact amount of your monthly payment is based on your monthly disposable earnings.
Monthly disposable earnings are basically your income less your expenses for your family size and county of residence.
The collection agencies typically use the Loan Rehabilitation Income and Expense form to help calculate your payment.
Most of my clients pay $5 per month.
The rehab program is a one-time program. You can only go through the loan rehabilitation program once per loan.
So if you completed it once before, you could not use it again for the same defaulted student loan.
Loan rehabilitation and credit scores
Loan rehabilitation will not remove late payments from your credit report.
Instead, after you complete the last of your loan payments, notice will be sent to the credit bureaus to remove the default status from your loans.
The late payment history will remain on your credit report for 7.5 years.
Click here to learn more about what to do when student loans are killing your credit score.
How to request a financial hardship reduction
You typically have to wait six months after the wage garnishment order has been issued before you can request it be stopped due to hardship. The one exception is if your financial circumstances changed dramatically due to injury, divorce, illness, etc. after the garnishment started.
To request the financial hardship reduction, contact the debt collector that has your federal student loan. Tell them you’re requesting a financial hardship hearing.
They should send you a “Request for Hearing” form, which includes the “Financial Disclosure Statement” form.
The form has one primary goal:
To determine if you can show that the wage garnishment is stopping you from providing for the basic living expenses for both you and your dependents.
When you submit the form, you want to provide as much evidence as possible to support your claim. You can include copies of your monthly bills, tax returns, pay stubs, etc.
In my experience, it takes about 2 months to get a decision.
Federal student loan borrowers may stop a wage garnishment after it starts by entering into the loan rehabilitation program. If that’s not an option, their only choice may be filing bankruptcy.
Private student loan borrowers may be able to stop a wage garnishment by contacting the judgment creditor and seeing if they’re open to a settlement. If the creditor refuses to settle, their only choice to stop the wage garnishment may be bankruptcy.