Defaulting Student Loan Borrowers Risk Wage Garnishment

The U.S. Education Department is set to resume garnishing wages from student loan borrowers in default.

The practice, put on hold during the pandemic, will resume early next year, according to multiple news accounts Tuesday (Dec. 23).

“We expect the first notices to be sent to approximately 1,000 defaulted borrowers the week of Jan. 7,” a department spokesperson told NPR, adding that wage garnishment notices are expected to increase on a monthly basis throughout the year.

As that report noted, borrowers are considered in default after going more than 270 days without making a loan payment. When that happens, the government can try to recoup its debt by seizing tax refunds and Social Security benefits, or by ordering an employer to set aside up to 15% of a borrower’s pay.

Betsy Mayotte, president and founder of The Institute of Student Loan Advisors, told NPR that while borrowers have been expecting the program to resume, the timing is unfortunate. Many of them are also facing increases to Affordable Care Act (ACA) health insurance premiums, scheduled to go into effect next year.

“The two will almost certainly put significant economic strain on low and middle income borrowers,” she said.

And these consumers are already facing major financial pressures, as recent PYMNTS Intelligence research has found. That data shows that among struggling households, upwards of a third of consumers who live paycheck to paycheck but struggle to pay their bills say they’ve been spending more than usual in the past six months, which in turn has hurt their savings.

As reported here, the cost of food has been a major stressor mentioned by 56% of consumers interviewed by PYMNTS Intelligence. “Additionally, 55% say the same of inflation, and 23% say rising costs are their greatest source of financial stress,” per that report.

The news comes a little more than a week after a Financial Times (FT) report that more than 9 million people — a figure that represents nearly 20% of all borrowers — have missed at least one student loan payment this year.

“They just don’t have the money,” Charlie Wise, senior vice-president and head of global research and consulting for credit bureau TransUnion, said in an interview with the FT.

“That speaks more broadly to some of the weaknesses that we’ve seen in the jobs market for recent grads.”