There are four ways to stop a student loan garnishment for a federal student loan after it starts:
- Negotiate a settlement
- Enter into a loan rehabilitation program
- Request a financial hardship reduction
- File bankruptcy
Of the four, settlement and bankruptcy are the only two that will stop the student loan wage garnishment immediately. Settlement stops it because you’ll be paying off your student loan debt. Bankruptcy works because both chapter 7 bankruptcy and chapter 13 bankruptcy stop wage garnishment as soon as you file your case.
The other two, student loan rehabilitation and a financial hardship reduction, take a few months to stop wage garnishment.
Notice I didn’t mention loan consolidation as a way to stop a wage garnishment. This is because once a wage garnishment notice is sent to your employer, loan consolidation is no longer an option.
COVID 19 and federal student loans
The US Department of Education has suspended collections for most federal student loan borrowers. The suspension lasts from March 13, 2020, until September 30, 2020. To qualify for the suspension, your federal loan must be owned by the Department of Education. The suspension does not apply to any private student loan you may owe. The Department of Education has said it is refunding garnishment money taking from borrowers’ paychecks after March 13. Contact the debt collector that has your loans for more information.
How student loan garnishment works
After you default on student loan debt, your lender will try and collect from you. With a private loan, a private lender has to sue you and win the lawsuit before it can send a wage garnishment order to your employer.
And once that happens, the only way to stop the wage garnishment for a private loan is to negotiate a settlement or file bankruptcy.
Federal student loan debt is different.
The government can send a wage garnishment order to your employer without first suing you and getting a court order. This is because Congress gave the government the right to collect student loan debt using an administrative wage garnishment order.
The government’s power to send a wage garnishment notice to your employer is triggered after you default on a federal loan.
Once that happens, the wage garnishment order allows for 15% of your wages to be garnished for that set of federal student loans.
If you happen to have another set of federal student loans in default, a second wage garnishment order can be sent to your employer. That wage garnishment order will allow another 10% of your wages to be garnished.
Other collections can continue
So you know, you can have a federal student loan garnishment, a tax refund offset, and a Social Security offset at the same time.
Because of that, if you’re expecting a large tax refund, wait until you get your loans out of default before filing your tax return.
How the loan rehabilitation program works
The student loan rehabilitation program requires you agree to a repayment plan whereby you’ll make 9 monthly payments. After your ninth payment, your defaulted federal student loan will be brought back into good standing. And when that happens, your federal student loan will again be eligible for student loan forgiveness, deferment, forbearance, and student loan payment plans based on your income.
One other key benefit of the program is that it will suspend wage garnishment after you make your fifth monthly payment. This means you’ll make 5 monthly payments on top of the 5 months of wage garnishment before the garnishment stops.
The exact amount of your monthly payment is based on your monthly disposable earnings, which is basically your income less your expenses for your family size and county of residence.
Most of my clients pay $5 per month.
The rehab program is a one-time program. So if you completed it once before, you cannot use it again for the same defaulted student loan.
Click here to read the Complete Guide to the Student Loan Rehabilitation Program and How to Get Out of Student Loan Default.
How to request a financial hardship reduction
You typically have to wait six months after the wage garnishment order has been issued before you can request it be stopped due to hardship. The one exception is if your financial circumstances changed dramatically due to injury, divorce, illness, etc after the garnishment started.
To request the financial hardship reduction, contact the debt collector that has your federal student loan. Tell them you’re requesting a financial hardship hearing. They should send you a “Request for Hearing” form, which includes the “Financial Disclosure Statement” form. The basic goal of that form is to determine whether you can present credible evidence that the wage garnishment stops you from providing the basic living expenses for both you and your dependents.
When you submit the form you want to provide as much evidence as possible to support your claim. You can include copies of your monthly bills, tax returns, pay stubs, etc.
In my experience, it takes about 2 months to get a decision.
Federal student loan borrowers may be able to stop a wage garnishment after it starts by entering into the loan rehabilitation program. If that’s not an option, their only choice may be filing bankruptcy.
Private student loan borrowers may be able to stop a wage garnishment by contacting the judgment creditor and seeing if they’re open to a settlement. If the creditor refuses to settle, their only choice to stop the wage garnishment may be bankruptcy.