Department Of Education Prepares To Seize 15% Of Student Loan Borrowers’ Pay

Dire emails from the U.S. Department of Education flooded the inboxes of millions of defaulted federal student loan borrowers during the past week, warning that the government is preparing to seize a portion of their earnings. The notices followed a formal announcement the department made last month indicating that government officials would quickly step up collections efforts against defaulted borrowers.

“Collections on defaulted federal student loans are resuming,” reads the email sent to borrowers. “This means that your tax refund or other federal benefits may be withheld. Later this summer, your employer may also be required to withhold a portion of your pay until you begin to repay your defaulted federal student loan.”

More than five million borrowers are currently in default on their federal student loans, according to the department. But that figure may double by the end of the year as millions of additional borrowers have already begun falling behind on their monthly payments.

“4 million borrowers are in late-stage delinquency,” said the department in its April statement announcing the resumption of collections activities. “As a result, there could be almost 10 million borrowers in default in a few months. When this happens, almost 25 percent of the federal student loan portfolio will be in default.”

Here’s what to know about these latest threats against student loan borrowers, and how to protect your earnings.

Treasury Offset Will Be First Wave Of Actions Against Student Loan Borrowers

The Department of Education first intends to refer defaulted federal student loan borrowers to the Treasury Offset program. This is a program administered by the U.S. Department of Treasury that allows the government to intercept and offset income and benefits originated by the U.S. government.

“Going forward, the Department of Education, in conjunction with the Department of Treasury, will shepherd the student loan program responsibly and according to the law, which means helping borrowers return to repayment—both for the sake of their own financial health and our nation’s economic outlook,” said U.S. Secretary of Education Linda McMahon in a statement last month.

Treasury Offset allows the government to seize 100% of federal tax refunds owed to a defaulted federal student loan borrower; up to 25% of federal employee retirement benefits; and up to 15% of federal wages, Social Security benefits, and Railroad Retirement benefits.

Administrative Wage Garnishment Against Student Loan Borrowers Will Begin This Summer

Once Treasury Offset referrals have been initiated, the Department of Education will further step up collections actions against defaulted federal student loan borrowers later this summer through administrative wage garnishment. This program allows the federal government to order a private employer to withhold up to 15% of a borrower’s wages, and apply that to the borrower’s defaulted federal student loan balance.

“Later this summer, all 5.3 million defaulted borrowers will receive a notice from Treasury that their earnings will be subject to administrative wage garnishment,” said the department in a statement last week.

Unlike a private student loan lender or creditor, the federal government does not need to file a lawsuit in court or obtain an order from a judge to be able to garnish the pay of a defaulted federal student loan borrower. The Department of Education is able to do this administratively under federal law by simply ordering the employer to withhold a portion of a borrower’s earnings, effectively bypassing the court system and avoiding the need for litigation.

Student Loan Borrowers Must Receive Notice Prior To Treasury Offset Or Wage Garnishment

While the government does not require a court order to refer a defaulted federal student loan borrower to Treasury Offset or to garnish their wages, borrowers still have due process rights under the U.S. constitution. Borrowers must be given notice of these actions and an opportunity to respond.

“All FSA collection activities are required under the Higher Education Act and conducted only after student and parent borrowers have been provided sufficient notice and opportunity to repay their loans under the law,” said the Department of Education in its statement in April.

The mass email notifications sent to defaulted federal student loan borrowers during the last week do not constitute that official notice. Instead, they represent initial outreach efforts by the department to notify borrowers of the looming collections efforts.

“All borrowers in default will receive email communications from FSA over the next 2 weeks making them aware of these developments and urging them to contact the Default Resolution Group to make a monthly payment, enroll in an income-driven repayment plan, or sign up for loan rehabilitation,” said the department in April.

Typically, formal notices prior to Treasury Offset or wage withholding are sent by mail (not email) to a borrower’s last known mailing address. Borrowers would then have a fixed period of time to respond (typically 65 days for Treasury Offset and 30 days for administrative wage garnishment) before offset or garnishment begins. Federal student loan promissory notes put the onus on the borrower to keep their contact information (including their mailing address) up to date with their loan servicer and the Department of Education. So, if a formal offset or wage garnishment notice is sent to an outdated address because the borrower never updated their contact information, and the borrower is therefore unable to respond within the notice period, there may not be much recourse.

Borrowers With A Defaulted Federal Student Loan Have Options

Student loan borrowers facing imminent wage garnishment or benefits offset may have options. Those who believe they were erroneously put into default can dispute their loan status. Borrowers who dispute the underlying debt itself, or have a severe financial hardship, can request an administrative hearing once they receive a formal notice of Treasury Offset or wage garnishment. Borrowers also can apply for an administrative discharge if they qualify (i.e., if they have a total and permanent disability).

Defaulted federal student loan borrowers also may have options to get out of default and back into good standing, such as through loan rehabilitation or Direct loan consolidation. This can then allow them to access affordable payments through income-driven repayment plans, and pathways to eventual student loan forgiveness.

“One option for getting your loan(s) out of default is loan rehabilitation,” says the Department of Education notice sent to borrowers this week. “To start the loan rehabilitation process, you must contact the Default Resolution Group to determine if you are eligible.” Meanwhile, “Consolidation can get your loan(s) out of default and could lower your monthly payments if you have multiple loans.”

However, not everyone is eligible for rehabilitation or Direct loan consolidation. And there could be some possible downsides and other considerations, such as collections costs and differences in credit reporting outcomes. Borrowers should fully evaluate their federal student loan default resolution options before deciding on a specific course of action.

Meanwhile, borrowers who are behind on their monthly student loan payments but have not yet defaulted may still have time to avoid Treasury Offset and wage garnishment. Federal student loans don’t go into default until they are 270 days past due. Those who are short of that threshold can potentially bring their accounts current by paying their past due balance, requesting a deferment or forbearance, or applying for more affordable payments through income-driven repayment plans. Borrowers can contact their loan servicer for more information.