Imagine that you’re at work and the HR director wants to speak with you. You think of the worst case scenario: You’re 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. 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. From now on, they’ll take a chunk of your paycheck to pay back your outstanding student loan balance.
Suddenly, your employer is right smack dab in the middle of a default debacle, forced to be the messenger in a situation that isn’t fun for anybody.
Defaulting on your student loans for any reason can have serious consequences, including wage garnishment. Find out how the wage garnishment process works if you fall behind on your payments.
Why not paying your student loans will cost you
If you stop making payments on your federal student loans, they will still continue to grow and accrue interest over time. After 270 days, the government will designate your loans as defaulted. 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. Even if your loan balance is in the thousands, you’ll owe that amount right away. Not only that, but your loans are sent to a collection agency and reported as delinquent to the major credit bureaus.
In addition, there may be collection charges which can add hundreds or even thousands to your loans. Depending on the type of loan you have, you could face collection charges as high as 24 percent of your loan balance.
If you do not take action right away, the federal government can contact your employer to garnish your wages. That means they can legally take out 15 percent of your disposable income directly from your paycheck.
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.
However, if you miss your payments, expect your servicer to take aggressive action to get their money back. If you’re worried about wage garnishment, follow these steps to prevent defaulting on your student loans:
1. Make consistent, timely payments
If you have multiple student loans, remembering the different minimum payments and due dates can be confusing. Setting up automatic payments or reminders can help you keep track of your payments, minimizing the risk that you’ll miss one.
2. Sign up for an income-driven repayment plan
If you are struggling to afford your payments, an income-driven repayment (IDR) plan may make your payments more manageable. With an IDR plan, the government extends your repayment term and caps your monthly payment at a percentage of your discretionary income. An IDR plan can dramatically reduce your monthly payment.
While you will likely pay more in interest over the length of your new repayment term, an IDR plan can be a big help when you’re on a small salary.
3. Ask for a deferment or forbearance
While making your payments is important, there may be times when it’s just not possible. If you’ve lost your job, are facing a medical emergency, or have some other economic hardship, your student loans may be your last priority.
However, rather than letting your loans enter default, you can contact your lender and defer your payments or enter forbearance. This process allows you to postpone payments — without entering default — while you get back on your feet.
How to stop wage garnishment
If you’re already facing wage garnishment, don’t give up hope. You can still take control of your debt (and your paycheck). Consider these three ways to get out of default and end wage garnishment:
1. Consolidate your loans
One of the easiest ways to get out of default is to combine one or more federal loans into a Direct Consolidation Loan.
If your loans are in default, the government requires you to sign up for an income-driven repayment plan to take out a Direct Consolidation Loan. Or, you can make three consecutive, voluntary, and on-time payments on your defaulted loans before consolidating.
Consolidating your loans can extend your repayment period and reduce your payments, but you may end up paying more in interest over the length of the new loan. But consolidating your defaulted loans can help you get back on track.
2. Rehabilitate your loans
Another option is to rehabilitate your loans. Under a loan rehabilitation agreement, you promise to make nine monthly payments during a period of 10 consecutive months. The loan servicer will work with you to set a payment that is 15 percent of your discretionary income.
Depending on your income and financial obligations, you may be able to enter rehabilitation with a monthly payment as low as $5.
3. Pay off your debt in full
While it may sound impossible, paying off your debt in full can be the fastest way to get out of default and end wage garnishment. Because defaulting on your loans can wreck your credit, it may be worth emptying out your savings, if possible. Or, if you have a relative or loved one who can help, it may be a smart idea to ask them for assistance with your debt.
Getting out of default
Defaulting on your student loans is serious and can have severe consequences, including wage garnishment. If you’re in danger of falling behind on your payments, contact your lender to discuss your options. Following up with your loan servicer and coming up with a plan together can prevent you from losing out on your paycheck.
Kat Tretina contributed to this article.
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