Wage Garnishment For Student Loans, Or How The Government Can Take 15% of Your Paycheck To Cover Missed Payments
Imagine that you are at work and the HR director wants to speak with you. You start thinking of the worst case scenario: you are getting fired.
You start replaying in your mind everything you’ve done and everything you’ve said as you try to prepare yourself to handle this situation gracefully.
After you walk into the HR director’s office, they close the door and hand you an official letter from the U.S. Department of Education. Suddenly, you are relieved that you are not, after all, getting fired, but your fear now moves onto something else.
The government has sent you this letter to notify you that your wages are being garnished and that 15% of your income will now be automatically taken out of your paycheck in order to pay back your outstanding student loan.
Now your employer is right smack dab in the middle of a default debacle, essentially forced to be the messenger in a situation that isn’t fun for anybody.
While every borrower has probably fantasized about not paying back their student loans. in reality, it can be a huge price to pay. And despite what you may have read on the NYT. wage garnishment is a consequence for many with delinquent student loans.
Here’s how wage garnishment could go down if you stop paying your student loans.
Why Not Paying Your Student Loans Will Cost You
If you stop paying your student loans, they will still continue to grow and add on interest over time. After a period of 270 days, your loans will go into default. Having your loans in default can have an adverse effect on your credit score, making it difficult to get approved for an apartment or a new credit card.
When your loans are in default. the entire balance of your loan, plus any interest, is due immediately.
Not only that, but your loans are sent to a collection agency and reported as delinquent to various credit bureaus.
All the while, your balance is increasing due to additional collection charges. According to Finaid.org. current collection charges amount to 19.58% of the payment on defaulted Stafford, PLUS, and consolidation loans.
If no action is taken, the federal government can contact your employer and legally take out 15% of your disposable income directly from your paycheck, which is called wage garnishment.
In recent news, activist groups such as the Corinthian15 have been making bold moves, suggesting that borrowers should revolt and not pay back their student loans.
Regardless of your personal or political beliefs
on higher education, it’s important to know the consequences of not paying back your student loans.
How to Avoid Wage Garnishment
Wage garnishment is a serious issue and one that can be avoided. Typically, wage garnishment is a last resort for creditors. They will let you know when your payments are past due and give you warning before your loans end up in default .
If you are having trouble making your student loan payments, talk to your loan servicer about your options. It’s better to put your loans into deferment or even forbearance than to do nothing. If you try to avoid your loans, they will still come back to haunt you for years to come.
Inaction and lack of communication will cost you in this case. Don’t believe me? When I was in New York, I met an elderly woman who at age 72 was having her Social Security check garnished from an unpaid student loan for an education that she had completed decades ago.
Unfortunately, being unemployed or retired doesn’t mean you are off the hook. If you are unemployed, in some severe cases debt collectors can both freeze your bank account and garnish some wages.
If you are married and live in a community property state like California, creditors may go after your spouse’s income. Somehow I don’t think that will go over so well in your relationship.
Simply by communicating with your loan servicer and figuring out your options together, you can stay in good standing on your loans. In order to avoid wage garnishment, you should take the following steps:
- Make consistent, on-time payments on your student loans.
- If you are having trouble paying back your loans, talk to your loan servicer.
- Change your repayment plan to an Income Driven Plan.
If your wages are currently being garnished:
- Talk to your loan servicer about your options immediately .
- Call the U.S. Department of Education’s Debt Collection Service Information Center. The number should be listed on your wage garnishment letter.
- Come up with a plan and make on-time payments, each and every time.
The easiest way to get out of default is by applying for a Direct Consolidation Loan. You can consolidate a defaulted loan if you agree to repay your new loan with an Income Driven plan such as Income-Based Repayment or Pay As You Earn. In this case, if your income is truly the issue, your payments could be $0.
The key is to follow-up with your loan servicer, tell them your situation, and work together to come up with a plan.