If you have defaulted federal student loans, there’s a new reason to pay attention to your paycheck. The U.S. Department of Education has officially restarted aggressive collection efforts after a years-long pause, and that includes wage garnishment.
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The Department of Education estimates that 5.3 million borrowers could be affected by this renewed push for wage garnishment, according to NBC New York. If you’re in that group, your paycheck or Social Security benefits could shrink by 15% starting soon.
Ramsey Solutions’ George Kamel recently touched on this issue in a new video, explaining who’s affected and what you can do to stop it. Here’s everything you need to know.
1. Up to 15% of Your Pay Could Be Taken Automatically
Wage garnishment lets the government take money directly from your paycheck to cover unpaid federal student loans. If you’re in default, which means you haven’t made a payment in more than 270 days, your employer could be required to withhold part of your pay and send it to the Department of Education.
The amount isn’t small. They can garnish up to 15% of your disposable income after taxes. By law, they must leave you with at least the equivalent of 30 times the federal minimum wage, which comes out to $217.50 a week. Still, that’s a big hit to most people’s budgets.
If you receive Social Security, they can take up to 15% of that as well, as long as it leaves you with at least $750 a month.
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2. Your Social Security Benefits Could Also Be Reduced
It’s not just paychecks that are at risk. Borrowers collecting Social Security could see part of their monthly benefit withheld if they’re in default.
The same 15% garnishment limit applies, and they must leave you with $750 a month. That could make it harder for retirees or disabled borrowers to cover essentials like housing, food and medical costs.
3. Scammers May Target You
Kamel warns that this crackdown could trigger an uptick in student loan scams. Fraudsters often buy or access lists of people whose credit has dropped, then contact them with offers to reduce payments or wipe out debt (but only if you pay a large upfront fee).
Anyone who asks for money upfront to help with student loans is a red flag. You should also watch out for companies charging you to do things you can handle for free, such as signing up for an income-driven repayment plan through studentaid.gov.
Even legitimate companies have been caught making false promises or omitting key details, so verify everything through the Department of Education before sharing personal information or money.
4. Though Limited, There Are Ways To Stop Garnishment
If you’ve received a notice that garnishment is coming, don’t panic. You have options for getting your loans out of default and protecting your paycheck.
- Pay the balance in full: Paying down your student loan balance will clear the debt immediately, but it’s not realistic for most borrowers.
- Loan rehabilitation: Loan rehabilitation is often a more realistic route since it requires making nine monthly payments within 10 months, typically 15% of your discretionary income. Once that’s done, your loan is removed from default status. That said, you can only rehabilitate a loan once.
- Loan consolidation: Loan consolidation means combining multiple federal loans into a single new loan. This takes your loans out of default and can make payments more manageable, but it may extend your repayment term and increase the total interest you pay.
- Challenge the garnishment: You’ll receive a 30-day notice before garnishment begins, and you can request a hearing if you believe it would cause financial hardship or if you’ve recently been unemployed or filed for bankruptcy.
How To Stay Ahead
Even if you’re not in default, this is a reminder to pay down your student loan balance as quickly as possible. Kamel points out that making only minimum payments costs you thousands in interest over time.
For parents, it’s also a reason to talk with your kids about avoiding student loans altogether and instead look at other options like scholarships or working part-time to pay for college costs.
And for everyone, it’s a lesson in not depending on government policy to solve your debt problems.
As Kamel puts it, administrations change and so do their rules. A forgiveness program that’s on the table today could disappear tomorrow, replaced with more aggressive collection efforts.
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: 4 Ways This New Government Policy Could Hit Your Paycheck
