When a borrower defaults on a student loan, the lender may be able to obtain a wage garnishment order to seize part of the borrower’s wages to repay the debt. The Treasury Offset Program (TOP) also allows the federal government to offset Social Security benefit payments and income tax refunds.
Court Order Not Required for Government Garnishment
If you default on a federal student loan, the U.S. Department of Education can garnish up to 15% of your disposable pay administratively, without a court order.
Disposable pay is the portion of an employee’s gross compensation that remains after subtracting health insurance premiums and any amounts that are required by law to be withheld, such as federal, state and local taxes.
The Treasury Offset Program (TOP) may be used to garnish up to 15% of Social Security benefit payments and to intercept federal and state income tax refunds to repay defaulted federal student loans.
It usually takes about a year after default for a borrower’s wages to be garnished and Social Security benefit payments and income tax refunds to be offset. These options are pursued only if the borrower has not been making payments after the loans entered into default.
Limitations on Administrative Wage Garnishment
If a borrower’s wages are being offset by more than one federal agency, the total garnishments cannot exceed 25% of disposable pay.
Borrowers must be left with at least 30 times the federal minimum wage, per week, after administrative wage garnishment. The current federal minimum wage is $7.25 per hour. Thus, borrowers must be left with at least $217.50 a week after wage garnishment.
If Social Security benefit payments are being offset, the borrower must be left with at least $750 in Social Security benefit payments per month.
Student financial aid funds, including student employment programs like Federal Work-Study (FWS), cannot be garnished.
Federal agencies cannot garnish a borrower’s wages if the borrower was involuntarily separated from their previous job until the borrower has been employed continuously in their current job for at least 12 months.
If the U.S. Department of Education wishes to garnish more than 15% of a borrower’s wages, they must sue and get a court order for wage garnishment. A borrower can also voluntarily agree to a higher amount of wage garnishment.
Right to a Hearing
The U.S. Department of Education or a guarantee agency must send written notice to a borrower at least 30 days prior to administrative wage garnishment. The borrower may then request a hearing.
The hearing will usually be held by an administrative law judge.
During the hearing, the borrower can challenge the existence or amount of debt or argue that the garnishment will cause financial hardship for the borrower, the borrower’s spouse and the borrower’s dependents.
Challenges to the Existence or Amount of Debt
Examples of challenges to the existence or amount of debt include:
- Repudiating the debt
- The debt is not your loan
- The lender is unable to provide the signed promissory note for the debt
- The debt is not enforceable
- The debt is not owing
- The loans have been repaid
- The debt has been settled
- The loans were discharged in bankruptcy
- Cancellation of the debt is pending
- The borrower is dead or totally and permanently disabled
- The loans are eligible for a closed school discharge
- The loans are eligible for an unpaid refund discharge
- The loans are eligible for a false certification discharge
- The debt is not eligible for garnishment or offset
- You have been making payments under a repayment agreement
- The debt is not in default
- You have filed for bankruptcy and the loans are subject to the automatic stay provisions during the pendency of the discharge petition
- The amount owed is incorrect
To challenge administrative wage garnishment based on financial hardship, the borrower must demonstrate that they will be unable to pay basic living expenses for the borrower, the borrower’s spouse and the borrower’s dependents if the wage garnishment order is executed.
How to Stop Wage Garnishment
A borrower may stop wage garnishment by
- Rehabilitating the defaulted student loans. This not only clears the default, but also ends wage garnishment.
- Obtaining a settlement of their student loans. After the borrower has made the required lump sum payment, the borrower will receive a paid-if-full statement and wage garnishment will end.
- Paying off the debt in full.
- Appealing for a suspension of wage garnishment on the basis of financial hardship. Generally, the borrower will have to show that their financial circumstances have changed, usually because of injury, severe illness, disability or divorce. The suspension of wage garnishment is usually limited to 6 months.
- Notifying the lender that the borrower’s employment was terminated involuntarily and the borrower has not yet been in their current job for at least 12 months.
Legal Authority for Administrative Wage Garnishment
The Higher Education Act of 1965 provides for administrative wage garnishment of defaulted federal student loans at 20 USC 1095a. The regulations provide additional requirements at 34 CFR 682.410(b)(9).
The Debt Collection Improvement Act of 1996 (P.L. 104-134) provides general authority for federal agencies to use administrative wage garnishment to recover debts owed to the agency. The regulations are at 31 CFR 285.11. These requirements are similar to those that appear in the Higher Education Act.
Court Judgment Required for Private Student Loan Garnishment
For a private lender to obtain wage garnishment, the lender must sue the borrower and obtain a court judgment against the borrower. The lender may then ask the court for a wage garnishment order.
If you are sued by a lender, show up in court, preferably with an attorney. You should always demand proof that the debt is owing, such as a copy of the signed promissory note. If the lender can produce only spreadsheets, those are not proof that the loan is valid.
Questions about the Treasury Offset Program may be directed to 1-800-304-3107.
Questions about defaulted federal student loans may be directed to the Default Resolution Group at 1-800-621-3115.
Problems involving federal student aid may be directed to the Federal Student Aid Ombudsman at 1-877-557-2575.
Questions about federal student aid programs may be directed to the Federal Student Aid Information Center at 1-800-4-FED-AID (1-800-433-3243).