For college graduates lucky enough to find a job but nevertheless falling behind on their student loan payments, another component of the Higher Education Act may enter their lives – wage garnishment.
The U.S. Department of Education can issue withholding orders for up to 15 percent of the disposable pay of borrowers who owe money on student loans. The withholding is authorized by the Debt Collection Improvement Act of 1996.
“Ryan”, a 2000 graduate of Ferris State University in Michigan, was recently notified by his manager that his company’s human resources office had been contacted by an agency that has taken over collection of his student loan.
He graduated with approximately $30,000 in student loan debt at an interest rate of 6 percent. Today, the debt stands at $72,000 and carries an interest rate of 9 percent.
Repaying the loan initially went smoothly, he says, but then came a stretch of unemployment which resulted in missed loan payments and penalty fees. His loan was then “sold” to a guarantor agency which tacked on thousand of dollars in additional fees.
After months of fruitless conversations with the agency on a payment plan, Ryan says garnishment may be the least painful of options.
“I’ve never seriously considered filing for bankruptcy,” he said. “But we’ve been unable to get a payment plan acceptable to both parties.”
The last proposal by the agency was to have him pay $600 a month. By his calculations, $200-$300 a month would still be a great strain.
Ryan traces some of his financial problems to a car loan for a vehicle that needed major repairs not long after he bought it – to the point the balance on the loan was more than what the car was worth.
Missing some of those loan payments compounded his problems.
“That’s where it all went downhill,” he said. “I got behind in my car payments.”
Garnishment, at least, would establish a payment plan less severe than that proposed by the agency, he said.
Nonetheless, he’s looking at paying on the student loan for many years.
Employers with workers facing more than one garnishment order may find winding their way through a maze of regulations can be cumbersome.
For example, federal law imposes a maximum on how much can be withheld from an employee’s pay for garnishment orders by setting a “floor” level of protected income. Except when the order in question is for family support, no more than 25 percent of the employees’ disposable, after-tax pay, or 30 times the federal minimum wage per week, whichever is smaller, may be subject to a garnishment order.
If an employee already is having 20 percent of his or her wages garnished from an agency such as children’s services, for example, and his or her employer receives another garnishment order from another creditor for, say, 10 percent, the second creditor will be allowed to garnish 5 percent, exhausting the 25 percent available for withholding.
If the U.S. Department of Education later enters the picture with a garnishment order for 15 percent, the employer can’t honor that order until either of the prior orders are satisfied or cancelled.
But don’t be concerned about the education department. While some garnishment orders expire, those issued under the authority of the Higher Education Act do not.
In fiscal year 2000, the education department and guaranty agencies collected nearly $107 million through wage garnishment of defaulters.