Federal student loans are unique in the world of consumer debt. There’s no other type of debt that offers so many opportunities for relief, such as multiple income-based repayment options, deferments and even discharge and forgiveness.
On the other hand, the federal government has some powerful collection tools if borrowers fail to repay their loan as agreed to in the promissory note. Not only is there no statute of limitations on the collection of federal student loans, but federal student loan holders aren’t even required to have a judgment — as most other debt collectors are — to garnish wages.
[Make sure to understand the consequences of student loan default.]
This week we’ll look at the garnishment process for federal student loans, how to appeal an administrative wage garnishment and ways to stop one once it’s started.
How the Garnishment Process Works
Unlike private student loan holders, federal student loan holders are not required to have a judgment before they garnish wages to collect on a defaulted federal student loan. The process starts generally three to six months from when the loan defaulted, with the loan holder sending a letter to the borrower warning of the pending administrative wage garnishment order and giving the borrower a chance to have a hearing.
If the borrower responds within 30 days that he or she wants a hearing, the garnishment order is postponed until the hearing is complete. If the request for a hearing comes after that 30-day deadline, the order will proceed but will cease or the amount withheld will be adjusted if the borrower successfully appeals during the hearing. Borrowers can also avoid garnishment at this point by entering into a written repayment agreement, such as loan rehabilitation.
[Learn what to do when a tax refund is seized for student loans.]
A borrower can pursue one of two avenues at a hearing: showing that the loan is not valid or that garnishment will cause financial hardship. If the borrower claims that the loan, the loan amount or the enforceability of the loan is not valid but the loan holder provides proof of the debt’s existence, the borrower must prove there’s an issue with the loan. It’s solely up to the borrower to prove the loan is not collectible.
If the borrower claims that garnishment will create financial hardship, the burden of proof is again on the borrower. Generally this is done through submission of a financial disclosure form.
If it appears that your expenses are reasonable — that is, they are compared to the IRS standard of average amounts spent for basic living expenses for families of the same size as the borrower’s — and that garnishment will affect your ability to meet basic living expenses, the amount garnished may be lowered or canceled and revisited at a later date, sometimes every six months.
If you have a hearing, you can choose an oral or written hearing. If you choose an oral hearing, you’ll have a choice of whether this is done via phone or in person.
For an in-person oral hearing, the loan holder picks the location, which will likely be its office. You are responsible for all travel expenses and should expect to hear a determination from the hearing within as little as several days but no more than several weeks.
How Much Will Be Garnished
The loan holder may garnish up to 15 percent of your disposable pay for defaulted federal student loans. If multiple federal student loan holders are seeking wage garnishment, the total cannot exceed the lesser of 25 percent or the amount by which your disposable income exceeds 30 times the federal minimum wage, which is $7.25.
For example, if your income is $400 a week after deductions, 25 percent of that is $100. Thirty times the minimum wage is $217.50. Subtract that from your weekly $400 and the amount is $182.50. Since $100 is the lesser of those two numbers, that is the amount the loan holders will garnish from your paycheck. In a future article, we’ll cover the guidelines that private student loan holders must follow to garnish wages.
[Learn the timeline of federal student loan delinquency, default consequences.]
How to Stop the Garnishment
You have three options for stopping garnishment orders. You can pay the loan in full, rehabilitate it or consolidate.
Rehabilitation is often the most beneficial in the long run, since it has other benefits, such as lower collection costs and updated credit reports, but you will have to make voluntary payments in addition to the garnished amount for the first five months.
Borrowers can also consolidate to get out of default and stop garnishment; however, they will be required to make several voluntary payments before the loans will be released. Both options also put the loans back in good standing and make them again eligible for affordable income-driven repayment options.
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Understand Federal Student Loan Wage Garnishment originally appeared on usnews.com
