Student loan defaults are rising — and wage garnishment is coming back

Federal student loan borrowers in default could see their wages garnished beginning this month as the Trump administration resumes involuntary collections after years of pauses and limbo.

Wage garnishment — which can dock up to 15% of a borrower’s disposable after-tax pay — only applies to federal student loan borrowers who are in default. To be in default, borrowers must be 270 days or more behind on their payments.

An estimated 5.5 million borrowers are already in default, with many of them in default prior to the pandemic, according to an analysis of federal student loan figures from the American Enterprise Institute (AEI). Another 6 million borrowers are delinquent on their debts, putting them at high risk of default, the AEI reported.

Betsy Mayotte, president and founder of The Institute of Student Loan Advisors (TISLA), said the U.S. is headed toward an unprecedented spike in student loan defaults with millions more borrowers at risk.

The Biden administration placed nearly 7 million additional borrowers on the Saving on a Valuable Education, or SAVE, repayment plan. The SAVE plan put those loans in administrative forbearance in July 2024, pausing borrowers’ payments.

However, the SAVE plan faced legal challenges off the bat from several Republican-led states and was ultimately killed in a legal agreement reached in December. The agreement requires SAVE borrowers to switch to other federal repayment plans, which are likely to have higher monthly payments.

"I really am worried that default numbers are going to go way, way up," Mayotte said.

As the Education Department ramps up involuntary collections this year, Mayotte notes that wage garnishment isn’t new. The Education Department has a legal responsibility to American taxpayers to collect on outstanding federal debts, she added.

How wage garnishment works

Before wage garnishment kicks in, the defaulted loans must be transferred from your servicer to the Education Department’s Default Resolution Group (DRG). You’ll receive a written notice to your last known address of the government’s intent to garnish your wages in 65 days if you don’t act.

However, it’s your employer who withholds the money from your paycheck to send to the government, according to the Office of Federal Student Aid (FSA).

When the Education Department garnishes wages, a borrower must be left with 30 times the federal minimum wage per week, or $217.50, to fall under the 15% of disposable pay limit, said Mark Kantrowitz, a nationally recognized financial aid and college planning expert. 

And it’s not just your paycheck the government can go after to recoup your student loan debt.

“You also have your federal income tax refund getting intercepted, and if you're receiving Social Security disability or retirement benefits, up to 15% of that can be offset,” Kantrowitz explained, adding that you must be left with at least $750 in monthly Social Security benefits.

Student loan defaults do more than take a sizable bite out of your paychecks. The negative activity is reported to the major credit bureaus and can remain on your credit report for up to seven years after the date you default. This can impact your ability to get approved for credit cards, auto loans and mortgages, Kantrowitz noted.

What to do if you’re in default (and how to avoid it)

Once a borrower receives a notice of wage garnishment, they have limited options to rectify the situation. They can pay off the loans in full, consolidate the loans into a federal Direct Consolidation Loan or “rehabilitate” them. Rehabilitation means you agree to make nine consecutive, timely and affordable payments (based on your current income) to bring the loan out of default, Mayotte said.

You can also request a hearing to challenge the default, especially if the garnishment will produce “an extreme financial hardship” or if you’ve been employed for less than 12 months after an involuntary job loss, according to FSA.

Borrowers in default can face steep collection costs of up to 24% of the loan balance on top of what they owe. Rehabilitating the loan lowers those costs down to 15% and consolidation drops the charges down to 18%, Mayotte said.

To avoid default altogether, speak to your loan servicer immediately if you are having trouble affording your student loan payments. For many people, payments under an income-driven repayment (IDR) plan are a better way to go than facing wage garnishment, Kantrowitz said.

“Income-based repayment is 10% or 15% of discretionary income, which is your [adjusted gross income] minus 150% of the poverty line,” he explained, noting that AGI is usually lower than your disposable pay.

He adds that the Education Department has also lost contact with more than half of federal student loan borrowers due to outdated contact information, meaning many borrowers might not be aware they’re in default, Kantrowitz said.

To avoid any surprises, make sure your contact information is up to date on studentaid.gov, and go on your loan servicer’s website and update it there, too, Kantrowitz advised.

You can use the FSA’s Loan Simulator tool to estimate monthly payments under other plans if your current payments are unaffordable or if you were on the SAVE plan and need to switch.