Will Student Loan Consolidation Stop Wage Garnishment?
Student loans are one of the most commonly defaulted on debts in America. Every year, over one million Americans end up defaulting on their federal student loans, leaving them in a vulnerable financial position.
In 2003, The Debt Collection Improvement Act came into effect, giving the US Department Of Education the right to garnish the wages of borrowers who’ve let their student debt go into default.
Today, we’ll discuss what options are available should one find themselves in this situation and whether consolidation can stop the seizure of wages.
How Does Wage Garnishment Work?
Wage garnishment is a process that an unpaid creditor can go through by which they collect payments directly from the debtor's employer. A court must grant this process, and it’s only done if all prior attempts to collect on the debt have failed.
When it comes to federal student loan wage garnishment, there are two types the government can use.
- Standard wage garnishment: This occurs when the lender receives a court decision that issues an order to a borrower's employer, requiring them to pay a specific sum to the creditor each paycheck
- Administrative wage garnishment: The Debt Collection Improvement Act (DCIA) gave the US Department of Education the ability to issue these orders directly to one's employer without a court order
It’s important to note that the Department of Education can only engage in this legal process once a borrower's arrears have been designated as defaulted, which requires 360 days of non-payment. The DCIA grants the Education Department the right to seize up to 15% of one's disposable income until the outstanding debt has been paid off.
How To Avoid Wage Garnishment
This legal process is a last resort effort that’s only undertaken once the debtor has failed to make payments for over 360 days. If one feels they’re in danger of this court issue, there are several steps one can take to avoid it.
- Keep up with payments: The most obvious way to forego this legal proceeding is by keeping up with payments. This is especially true if one's student loans are close to going into default (meaning no payment has been made for 90 days)
- Enroll in an income-driven payment plan: An income-driven payment plan (IDR) is an umbrella of payment plans that can reduce one's monthly payments to as little as 10% of their monthly discretionary income. This option can help lower the monthly payment to a manageable amount
- Apply for forbearance: Even if the borrower intends to make their monthly payments, sometimes circumstances arise that make this impossible. Whether this is the loss of employment or a medical emergency, the debtor has the option of applying for forbearance. It’s important to understand that although the lender may grant this request, they’re under no obligation to do so
How To End Student Loan Wage Garnishment
Being subjected to wage garnishment can be stressful for many people, especially if they live on a fixed income. Luckily, there are several options one can explore to end this legal action, one of which is consolidation.
- Student loan debt consolidation: This is the best course of action for those who have more than one student lending product in default and are either facing or currently experiencing wage garnishment. For those with federal student debt, they must apply for a Direct Consolidation Loan through the Department of Education under an income-driven repayment plan. If, after 20 or 25 years, the lending product still carries a balance, the remaining balance may be eligible for forgiveness. Those with private student arrears will have to seek out a consolidation loan from a lender
- Student loan rehabilitation: This is a program that allows borrowers to remove their student arrears from default. This can also be used to stop the creditor from legally taking your paychecks. It requires that the borrower enroll in a payment plan and stay current with monthly payments. This program doesn’t increase the interest rate, meaning it doesn’t make the debt more expensive in the long run
- Pay off outstanding balance: For those who can afford it, the best way to end this legal proceeding is to pay off the outstanding student arrear balance. While this may not be possible in most cases, it’s the cheapest and easiest route
The Bottom Line
Student loan wage garnishment can be a stressful and financial trying experience. Luckily, for those willing to commit to a payment plan, there are several options available to stop this court issue and bring student debt out of default.