You defaulted. Now you’re worried about the government taking money out of your bank account (they can’t) or taking your tax refund (they can) or taking money out of your check (absolutely).
You’re right to worry. Having your pay taken for a defaulted loan not only sucks, but it places many people in a financial hardship that makes it difficult to live.
If you’re looking for information on how to stop it fast, you’re in the right place.
Let’s get to it.
#1 What is an Administrative Wage Garnishment?
An administrative wage garnishment is a collection tool used to collect a debt owed to a federal agency.
Typically you’ll see it used to collect unpaid taxes, SBA loans, and the big one: a defaulted student loan.
Because it’s an administrative wage garnishment, the Department of Education doesn’t need to sue you and get a judgment.
The federal wage garnishment rules for student loans allows the Department to send a wage withholding order to your employer once you default. They cannot use that order to garnish money from your bank account for student loans.
#2 What is an Administrative Wage Garnishment Order?
A wage garnishment order is a letter sent to an employer directing them to take the lesser of:
- 15% of an employee’s disposable pay or
- The amount exceeding 30 times the prevailing minimum wage for a federal loan that’s in default.
Disposable pay is the pay that remains after deducting amounts required by other laws to be withheld (health insurance premiums, taxes, Social Security.
Administrative Wage Garnishment Formula
Say you have weekly disposably pay of $400. You get to keep $217.50 (30 x the current minimum wage, which is $7.25).
The government may be able to take $82.50.
Fifteen percent of your disposable pay is $45.
Since $45 is less than $82.50, the government will take 15% of your pay versus 30x the minimum wage.
Your disposable income includes bonuses, commissions, vacation pay, etc.
#3 What is the Maximum Wage Garnishment Amount for Student Loans?
There’s not a cap to the amount that can be taken with a garnishment; there’s a percentage.
Typically, most student loan borrowers will have 15% of their disposable pay taken.
But if they have multiple loans that are in default with different companies or they have an existing child support order, the maximum wage garnishment amount is 25% of disposable pay.
If you have a wage withholding for child support, that order takes precedence over the withholding for your student loans.
#4 How to Avoid Administrative Wage Garnishment?
Seriously, that’s the easiest way to avoid wage garnishment.
But assuming that ship has already sailed, the best thing you can do is immediately reach out to the company that has your student loans and set up either a voluntary repayment plan or a rehab agreement.
Once that’s in place, you can decide if you want to continue on with the plan/agreement, or if you want to consolidate your federal student loans.
- Loan consolidation vs. Loan rehabilitation: Which is Better?
- How to consolidate defaulted federal student loans
#5 What is the Wage Garnishment Process for a Defaulted Student Loan?
The wage garnishment process starts when you default on federal student loan debt.
Once that happens, your loan servicer will send the loan to the Department of Educations, default units: the Default Resolution Group and the Debt Management and Collections System.
Some of you have loans made under the Federal Family Education Loan programs. Those defaulted loans may end up with the Department or with some other creditor. You may have to call around to find out where your loan went.
From there, your loan may stay with one of those units or it will be sent to a private debt collection agency like Coast Professional or Credit Adjustments Inc.
Regardless of whether your loan stays with the Department or it’s sent to a private collection agency, the next steps are the same:
- You contact the company to ask about how to avoid wage garnishment if it hasn’t already started.
- They’ll ask can you pay the student loan debt in full. You’ll say no.
- They’ll ask can you pay a settlement. Depending on the amount, you’ll say no.
- Finally, they’ll check to see if you’re eligible for the loan rehabilitation program. If not, you’ll be able to set up a voluntary repayment agreement, which won’t get you out of default but can stop a student loan garnishment
Click here to read What Happens After Student Loan Rehabilitation
#6 How to Stop Administrative Wage Garnishment for Student Loans?
Once the garnishment has started, there are 3 ways to stop it:
- Set up a rehabilitation agreement
- Request a hearing to stop the garnishment because it’s causing you an extreme financial hardship
- File bankruptcy
Of the three, filing bankruptcy stops the wage withholding the fastest. But you may not want to take that aggressive step. So you’re left with the first two.
With a rehab agreement, the garnishment will stop after you make 5 monthly payments.
And with a hardship hearing, it may take 2 to 3 months to get a decision as to whether the garnishment order will be lifted or if your amount will be reduced.
Click here to read How to Get Student Loans Out of Default Fast
#7 Administrative Wage Garnishment Notice
Many student loan borrowers learn their wages are going to be garnished for their student loans from their employers.
They call me complaining they never got a pending garnishment notice. Some of them, I learned, did get the notice. But many of them, the notice was mailed to an address they lived at years ago.
Under federal law, mailing a notice of pending wage withholding to a last known address is okay.
The promissory note you signed requires you to update the Department of your address.
But what if you did update your address before your wages were garnished and you have proof? Give a copy of that proof to the company handling your loans and see what they see.
If that doesn’t work, explore filing a complaint.