Why and How Student Loan Creditors Can Garnish Your Money

Lenders can garnish your bank account to recover student loan debt, and they can do it in different ways depending on whether your student loans are federal or private. For federal loans, your money can be garnished without a court order or judgment, while private loans can garnish a greater percentage of your disposable income.

Your wages won’t be garnished until you have officially defaulted on your loans, which will happen if you don’t make a payment for at least 270 days. Your student loans become delinquent the first day after a missed payment, and if you continue not making payments, then your loans will go into default, unless you either bring them up to date by making all the payments owned, go into forbearance, or go into deferment. If you default on your student loans, then your installment plan no longer applies. Your entire loan balance becomes due instead.

Key Takeaways

• Your wages will only be garnished if you have officially defaulted on your loans (i.e., you haven’t made a payment for at least 270 days).
• If you default on a federal student loan, then your wages or bank accounts can be garnished without a court order or judgment. The maximum that can be withheld for federal student loan garnishment is 15% of your disposable income.
• If you default on a private student loan, your creditor must first sue you to obtain a judgment and submit a court order to your employer before your wages can be garnished. The maximum that can be withheld for private student loan garnishment is 25% of your disposable income.

Federal Student Loans and Wage Garnishment

In the case of federal student loans, it’s important to realize that the government doesn’t need a court order or judgment to garnish your wages. In other cases, creditors must first sue you in court and obtain a judgment to garnish your bank account. Creditors who own your federal student loans don’t have to do this. They simply must send a letter to your home address, giving you a 65-day notice that your wages are being garnished. At that point, you can request a hearing in front of a judge to make your case.

If your wages are garnished, the maximum that can be withheld is 15% of your disposable income, which is the amount of your net paycheck after taxes. Your employer withholds these funds and forwards them to the appropriate creditor. This process is typically a last-resort process for those who deliberately refuse to pay their loans. There are always payment plans available to help those who are unable to pay.

Note

If you have federal student loans, then your federal payments, such as your tax refund or Social Security disability benefits, may also be garnished.

Private Student Loans and Wage Garnishment

In the case of private student loans, or those not offered by the federal government, the creditor doesn’t have any special wage-garnishing ability. The creditor must first sue you in court to obtain a judgment, and then they need to submit a court order to your employer with the details of the garnishment.

How much they are allowed to garnish depends on the state where you live. In some states, creditors can garnish up to 25% of your disposable income, which is usually considered to be 25% of your wages after 30 times the federal minimum wage, or $217.50.

However, some kinds of income can’t be garnished. Social Security payments, child support, alimony, disability benefits, as well as income from pensions, individual retirement accounts (IRAs), 401(k)s, and other retirement funds are safe from private student loan garnishment.

Stopping Wage Garnishment

The best way to stop wage garnishment is by taking action before your loans become delinquent. As soon as you realize you cannot make the payments, contact your loan servicer to discuss your options. If your loans are already in default, you have fewer options, but you should still contact your loan servicer to discuss rehabilitating your loans.

If you have received a 65-day warning of a wage garnishment, you may be able to stop it by contacting the collection agency to negotiate payment arrangements. If garnishment has started, you can request a hearing to stop it.

How Much Can My Wages Be Garnished on a Federal Loan?

If you have federal loans, your wages may be garnished up to 15% of your disposable income. Your disposable income is the money left over after taxes have been paid.

Is There Any Recourse if I Have Already Received a Garnishment Letter?

If you’ve received a garnishment letter, you may still contact your loan servicer and arrange a payment plan. Garnishment letters are sent out 30 days before garnishment begins.

When Is My Loan Considered to Be in Default?

Your loans are in default after you have not made payments for 270 days.

The Bottom Line

Student loans may be difficult to work into your budget, but most lenders are very accommodating if a borrower needs a different payment plan. It’s always better to work with your lender or ask for a forbearance rather than defaulting on your loans and risking garnishment.