Falling too far behind on your loans could upend your finances in a way you never imagined.
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When you applied for student loans, you knew you'd find a way to pay them off after graduating. Sure, they'd eat up a chunk of your income -- but you'd manage somehow.
But what happens if, despite your best efforts, you can’t make your monthly student loan payments? You could wind up facing an extreme repercussion: having your wages garnished.
What is wage garnishment?
When your wages are garnished, it means a court has ordered your employer to divert some of your earnings to a creditor. In this case, money is taken directly out of your paycheck and used to repay your student loans.
Your paycheck will get smaller, and your garnishment will be listed as a deducted item on your paystub. It looks like your deducted taxes, but it usually says “Garnishment.”
When can lenders come after your wages?
Missing a single student loan payment won't impact your paycheck. But if you fail to make payments for an extended period of time, your loans will be in default. At that point, up to 25% of your disposable income can be garnished from each paycheck (see below for more specific limits). Your disposable income is your total earnings minus all mandatory deductions, like taxes.
When can your wages be garnished? It depends on the type of loan. For federal loans, you're usually safe from default until you've gone 270 days without a payment. Once that happens, your lender (the government) can demand that you repay your entire loan balance plus accrued interest. If you can’t pay the entire amount immediately, the government can garnish your wages.
But that won't happen without warning. First, you'll receive a 30-day notice. The notice says that the U.S. Department of Education intends to garnish your wages. From there, you'll have the right to request a hearing to object to that garnishment.
If you do nothing, you’ll lose money from your paycheck. If you argue your case in a hearing, you may get a temporary reprieve, but you'll need to get current on your loan payments to avoid garnishment in the future.
The process works differently for private loans. In that case, your lender needs to sue you in federal or state court, get a judgment against you, and submit a court order for your garnished wages. Different states have different rules about how much of your income can be garnished in this type of scenario. Federal law, however, puts a limit on wage garnishment. A creditor can’t collect:
- more than 25% of your disposable income, or
- any amount that would bring your income under 30 times the federal minimum wage.
That’s a bit confusing, so let’s look at an example. Let's say you collect $1,000 per paycheck after deductions. That means your disposable income is $1,000. 25% of $1,000 is $250. Meanwhile, the federal minimum wage is currently $7.25. 30 times $7.25 is $217.50, and $1,000 - $217.50 = $782.50. In this case, your garnishment would be capped at the lower amount of $250.
So you’d be getting monthly paychecks of $750 instead of $1,000.
Avoiding wage garnishment
If you can’t afford to make your student loan payments, you probably also can’t afford to lose a large chunk of your paycheck. If you have trouble paying your loans, be proactive. Get ahead of the problem before it gets out of hand.
You have several options if you took a federal loan. First, you might request an income-driven repayment plan. Under this setup, your monthly payments are calculated as a percentage of your income instead of a preset amount. This makes them more manageable.
Another avenue you might explore is deferring your student loans. In doing so, you effectively hit pause on your loans until you're able to make payments again. If you took out subsidized loans, the government might cover your interest during your deferment period. Unsubsidized loans will continue to accrue interest.
If you took out private loans for college, your lender isn't obligated to offer either of these options. On the other hand, your lender wants to get its money back and doesn't want you defaulting. If you have trouble keeping up with your payments, reach out and see what options are available.
Your lender might agree to lower your monthly payments if you stay current on them. They might even let you defer your loans. In both cases, you’ll need to make it clear that you're experiencing financial difficulties. Keep in mind that your lender may charge a fee for deferment. And you can expect to continue accruing interest on your balance while you’re not paying.
Falling behind on your loans has consequences
Besides putting you at risk of wage garnishment, being delinquent on your loans can also drag down your credit score. A single late payment probably won’t hurt you too badly. But if you fail to make payments for an extended period of time, your score will take a beating.
Once that happens, you might get denied the next time you need to borrow money. If you do manage to get approved, you’ll probably get a much higher interest rate. In other words, you’re looking at serious consequences for not paying your loans.
Are you afraid that your wages will be garnished? Here are three things you can do:
- Keep tabs on when your loan payments are due. Missing them due to sheer negligence gives you less wiggle room in the future.
- If you have trouble paying your student loans, see if you qualify for an income-based repayment plan.
- Explore the possibility of deferring your loan payments (but be aware that interest may still accrue).
Whether you borrowed from the U.S. government or a private lender, you may have options. Don’t skip payments because it seems like a foregone conclusion. Be proactive and get ahead of the problem while you still can.