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.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.47% APR (with Auto Pay) to 7.59% APR (with Auto Pay). Variable rate loan rates range from 2.27% APR (with Auto Pay) to 6.89% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of August 15, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/15/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for SoFi.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.37% effective July 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.27% – 6.89%1||Undergrad & Graduate|
|2.27% – 7.75%2||Undergrad & Graduate|
|2.43% – 6.65%3||Undergrad & Graduate|
|2.24% – 6.67%4||Undergrad & Graduate|
|2.37% – 7.95%5||Undergrad & Graduate|
|2.46% – 9.24%6||Undergrad & Graduate|