Millennial money

Student loan default can gut your paycheck

There’s a dirty little secret of the student debt crisis: wage garnishment.

Default on your federal student loans and the government can take up to 15 percent of each paycheck to satisfy your debt. The Education Department can also withhold federal benefits like tax returns and Social Security payments.

“It’s a very powerful collection tactic that can really devastate the financial lives of the people subjected to it,” says Joanna Darcus, a staff attorney at the National Consumer Law Center who works with low-income student loan borrowers.

If you received notice of garnishment, don’t panic; you have options.

1

Stop garnishment before it starts When you begin struggling to make payments, your loan servicer can help find other options, including incomebased plans that cap your monthly payment.

Once your loans are in default you have a brief window to consolidate your federal loans (combining them into a single loan with its own interest rate) before the Education Department, via a private collection agency, moves to garnish your wages.

The collection agency serves you a 30-day warning during which you can stop the process by negotiating payment arrangements, but the agency must receive your first payment in that 30-day window.

To prevent garnishment from starting, you can request an appeal hearing, also within 30 days of your collection notice. You can file an appeal after garnishment starts, but the collection agency will continue to take up to 15 percent of your take-home pay while the case is reviewed.

Not sure whom to call? Check the National Student Loan Data System to find out who is managing your loan and how to reach them.

2

Rehabilitate your loan Loan rehabilitation is a one-time “Get out of default” card. Here’s how it works:

The collection agency sets a monthly payment based on your income, minus any reasonable monthly expenses. The amount could be as low as $5 a month.

You’ll need to provide documentation, like copies of pay stubs and bills, and complete a detailed form to help determine the amount. Any wages garnished due to defaulted student loans will be considered among your expenses.

Make nine payments of the agreed-upon amount within 10 months and your loans move out of default. Any wage garnishment will stop. And you're once again able to choose a repayment plan that works for you, including several income-based options that could drop your monthly payment to $0.