If you default on your federal student loans, the government has several ways of forcing you to pay without going to the trouble of filing a lawsuit against you. Of these enforcement options, the administrative wage garnishment is the harshest. Thankfully, it’s also one of the easier problems to avoid.
What is an administrative wage garnishment?
An administrative wage garnishment allows the Department of Education to order your employer to withhold 15% of your disposable income to repay your defaulted federal student loan. For borrowers barely making ends meet, a wage garnishment can cause financial ruin as their last dollar is sucked out of their paycheck.
The government isn’t required to sue you in court and doesn’t have to get a judgment to begin administrative wage garnishment.
Who is subject to administrative wage garnishment?
So long as you’re in good standing with your federal student loans, the government isn’t going to take part of your income.
The trouble comes if you’re in default, and even then only with respect your federal loans. Private student loans can’t use an AWG to force you to pay.
If your federal student loans are in default and you work as an employee, your payment is subject to administrative wage garnishment. Freelancers, 1099 workers, and self-employed borrowers don’t receive wages, so they don’t have to contend with an AWG.
How much will be taken from your paycheck?
Federal law allows the Department of Education to order your employer to deduct 15% of your disposable pay for each pay period until the AWG is lifted.
Disposable pay is equal to your gross salary (including salary, bonuses, commissions, and vacation pay) minus any deductions required by law. Those deductions include payroll taxes, but not amounts withheld for:
- court-ordered child support payments;
- garnishments stemming from court orders;
- retirement savings plans; or
- any other voluntary payments.
Limits on Administrative Wage Garnishments
Federal law limits the amount of all wage garnishments to 25% of your total wages. If you are subject to multiple garnishments, this limit may affect the amount that can be withheld for your federal student loans. If the amount being withheld is less then 25%, your employer will withhold up to that limit.
The law also excludes from garnishment the amount of your disposable pay equal to 30 times the federal minimum hourly wage. The federal minimum wage is $7.25 per hour, so you will not have any money taken if your after-tax pay is less than or equal to $217.50 per week.
Preventing Administrative Wage Garnishment
Even if you’ve been in default for a long time, you can avoid administrative wage garnishment if you act quickly enough.
By law, you must be given 30-days advance notice that the government is going to begin administrative wage garnishment. This notice is sent by regular mail to your last known address, proving yet again that it’s a good idea to let creditors know where to find you.
The notice will tell you how much you owe and let you know you have the right to:
- Inspect and copy records;
- Enter into a repayment agreement; and
- Request a hearing.
If you doubt the amount due or have a defense to the enforceability of the student loan, this hearing is your chance to provide proof.
The hearing also allows you to submit proof of economic hardship so that the amount withheld from your paycheck can be reduced or even eliminated.
Finally, you can obtain an exemption from administrative wage garnishment if you have been employed less than twelve months after an involuntary job loss.
So long as you request a hearing on or before the thirtieth day following notice of garnishment, the garnishment
can’t proceed until after the hearing. You can request a hearing once the garnishment starts, but your employer will continue to deduct money from your paycheck until the hearing officer makes a final ruling.
Consider these options to prevent administrative wage garnishment
If your loans are eligible for consolidation, entering the process will prevent the garnishment from starting. Once the garnishment order is in place, however, you will no longer be allowed to consolidate your student loans.
In the alternative, you may be able to rehabilitate your loan by entering into a repayment agreement with the collector. This agreement, which involves making 9 separate, on-time monthly payments over 10 months, avoids garnishment and return your loan to good standing so you can prevent further enforcement.
If neither consolidation nor rehabilitation is available, you may be able to enter into a satisfactory repayment arrangement with the collector. Though this won’t get you out of default, it will keep a garnishment off your paycheck.
As a final option, filing for bankruptcy will keep a garnishment from taking hold. Though bankruptcy may not wipe out the loans, it will stop the garnishment from going forward so you can get your finances in order.
How to stop a garnishment in progress
As I said before, you can’t consolidate a defaulted loan that’s already subject to garnishment. That doesn’t mean you have no options, just that they’re somewhat more limited.
You can rehabilitate a student loan during a garnishment, though the process is a bit trickier. The standard method for calculating your rehabilitation payment looks to your income and family size but doesn’t factor in the garnishment. To avoid this problem, you should use the more detailed financial disclosure that takes into account the amount already being withheld from your wages. The collector will probably ask you for information about your monthly expenses, so you’ll need to be organized.
Filing for bankruptcy will also lead to a withdrawal of the wage garnishment order. Depending on the type of bankruptcy, you either pay a portion of your debts over time or wipe out other obligations so you can afford to pay your student loans.
Don’t ignore a garnishment notice
There is no good reason to ignore a wage garnishment notice.
Even if you don’t live paycheck to paycheck, you have things you want to do with your income. Retirement planning, savings, putting aside money for car repairs, and being able to go to the movies are all more complicated when your money gets sucked up by the student loan collectors.
A wage garnishment is financially devastating, but there are so many ways to avoid one. Take steps to protect yourself – the alternative is too costly.