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Student Loan Wage Garnishment

Aparna Iyer Sep 30, 2018
Defaulting on student loans can have serious consequences like wage garnishment, wherein the US Department of Education can instruct employers to withhold a portion of the employee's salary in accordance with the respective laws.
Federal government helps students to pursue higher education by providing a number of loans under the Federal Student Aid Program. The loans that are sanctioned under this program can be obtained directly from the Federal Government, or one may be required to obtain one from institutions participating in the FFEL (Federal Family Education Loans) program.
Federal Stafford and Federal Perkins Loans are administered by the government under the Direct and FFEL programs. Repaying student loans sanctioned under the Federal Student Aid Program begins usually 6 to 9 months after a person graduates or drops out of school. The rate of interest is generally reasonable; on Perkins and subsidized Stafford loans.
Defaulting on the loan can backfire since the government has devised a number of ways of ensuring that defaulters make their promise to pay. Wage garnishment, wherein the government takes away or garnishes 15% of a student's disposable income as penalty, is one of the ways of recovering the amount.

Comprehending Student Loan Garnishment

The Debt Collection Improvement Act of 1996 (DCIA) authorizes Federal agencies to garnish the disposable income of an individual without a court order to collect delinquent non-tax debt that is owed to the Government provided the individual is not a Federal employee.
According to this Act, The US Department of Education (ED) is authorized to garnish 15% of the erstwhile student's disposable income in lieu of unpaid student loans. The organization that employs the student after graduating/dropping out of school is expected to comply with rules regarding garnishment even in the event of filing bankruptcy.
If the employee files a bankruptcy, the employer informs the ED and is supposed to advise the debtor to report the change in status to the government. The employee can annul the proposed garnishment by repaying the dues within 30 days of notice.
The ex-student also has the option of making alternate payments that would equal 15 percent of his/her salary to avoid it. People who have been unable to repay the borrowed sum on account of hardships may be given due consideration by the ED.
Wage garnishment can be disputed by thwarting the existence of the debt or by proving that the proposed one could result in extreme financial hardship. The ED does not have the authority to garnish wages if the former student has been involuntarily unemployed for a period of 12 months.
The Consumer Credit Protection Act limits the amount to be withheld to 25% of the debtor's pay. In case of multiple garnishments, employer can garnish wages in lieu of student aid if the total amount is limited to 25% of the disposable pay. These continue until the ED's Administrative Wage Garnishment system sends notification of cancellation.
In case the employee quits a job, the former employer is expected to notify the ED in writing or by phone within 10 business days, so that garnishments can be resumed by the new employer in accordance with the laws. One may seek legal counsel for further clarification regarding related rules and exemptions.

Other Consequences of Not Repaying Student Loans

Defaulting on a single payment may result in the student having to discharge loan obligations in accordance with an accelerated repayment schedule for the remaining amount.
In addition to wage garnishment, the government may withhold a portion of social security retirement benefits and disability benefits and deny the defaulter access to FHA (Federal Housing Administration) Insured Loans and VA (Veteran's Administration) Loans. Moreover, a default on student loans remains on record for 7 years.
It's evident that discharging the student loans is an obligation that cannot be taken lightly. A debtor should try to avoid defaulting and work out a system of discharging obligations in a timely and responsible fashion.