Wage garnishing is back for federal student loan defaults: What to do

Defaulting federal borrowers could see their wages garnished starting this month as the Trump administration resumes involuntary collections after years of pauses and limbo.

Wage garnishment – ​​which can be as much as 15% of a borrower’s after-tax disposable wages – only applies to federal borrowers in default. To be in default, borrowers must be 270 days or more behind on their payments.

An estimate 5.5 million borrowers are already in default, and many of them were in default before the pandemic, according to an analysis of federal student loan figures from the American Enterprise Institute (AEI). Six million more borrowers are delinquent on their debts, putting them at high risk of default, the AEI reported.

Betsy Mayotte, president and founder of the Institute of Student Loan Advisors (TISLA), said the United States is headed for an unprecedented rise in student loan defaults, with millions more borrowers at risk.

The Biden administration placed nearly 7 million additional borrowers on the Saving on a Valuable Education, or SAVE, repayment plan. The SAVE plan placed these loans into administrative forbearance in July 2024, suspending borrowers’ payments.

However, the SAVE plan faced early legal challenges from several Republican-led states and was ultimately killed in an attack. legal agreement reached in December. The agreement requires SAVE borrowers to switch to other federal repayment plans, which are likely to have higher monthly payments.

“I’m really concerned that the default numbers will increase significantly,” Mayotte said.

While the Ministry of National Education is stepping up involuntary collections this year, Mayotte notes that wage garnishments are not a new thing. The Department of Education has a legal responsibility to American taxpayers to collect unpaid federal debts, she added.

How Wage Garnishment Works

Before wage garnishment occurs, delinquent loans must be transferred from your servicer to the Department of Education’s Default Resolution Group (DRG). You will receive written notice at your last known address of the government’s intent to garnish your wages by 65 days if you don’t act.

However, it’s your employer who withholds the money from your paycheck to send to the government, according to the Federal Student Aid (FSA).

When the Department of Education garnishes wages, a borrower must end up with 30 times the federal minimum wage per week, or $217.50, to fall under the limit of 15 percent of available wages, said Mark Kantrowitz, a nationally recognized expert on financial aid and college planning.

And the government can’t just take your salary to recover your student debt.

“Your federal income tax refund is also intercepted, and if you receive Social Security disability or retirement benefits, up to 15% of this amount can be compensated” Kantrowitz explained, adding that you must have at least $750 in monthly Social Security benefits.

Defaulting on student loans does more than dramatically reduce your salary. Negative activity is reported to major credit reporting agencies and may remain on your credit report for up to seven years after the date of your default. This can impact your ability to get approved for credit cards, car loans and mortgages, Kantrowitz noted.

What to do if you default (and how to avoid it)

Once a borrower receives a notice of wage garnishment, they have limited options to rectify the situation. They can repay loans in full, consolidate loans into one Federal Direct Consolidation Loan or “rehabilitate” them. Forgiveness means you agree to make nine consecutive, timely and affordable payments (based on your current income) to bring the loan out of default, Mayotte said.

You can also request a hearing to contest the default, especially if the garnishment will cause “extreme financial hardship” or if you have been employed for less than 12 months after an involuntary job loss, according to the FSA.

Defaulting borrowers can face steep collection fees of up to 24% of the loan balance on top of what they owe. The rehabilitation of the loan reduces these costs to 15% and the consolidation of the charges to 18%, Mayotte indicated.

To avoid default altogether, talk to your loan servicer immediately if you’re having trouble repaying your student loan. For many people, payments under an income-driven repayment (IDR) plan are a better solution than facing wage garnishment, Kantrowitz said.

“Income-based repayment is 10% or 15% of discretionary income, which is your [adjusted gross income] minus 150% of the poverty line,” he explained, noting that AGI is generally less than your available salary.

He adds that the Department of Education has also lost contact with more than half of federal student loan borrowers due to outdated contact information, meaning many borrowers may not realize they are in default, Kantrowitz said.

To avoid any surprises, make sure your contact details are up to date on student aid.govand go to your loan servicer’s website and update it there as well, Kantrowitz advised.

You can use the services of the FSA Loan simulator tool to estimate monthly payments under other plans if your current payments are unaffordable or if you were on the SAVE plan and need to switch.