Student Loan Default: Wage Garnishment and Tax Refund Intercepts

The government can absolutely garnish your wages or taxes if you have defaulted on student loans and you don’t have a deferment.

This is why it’s so critical to find solutions if you’re struggling with your federal student debt payments. If you don’t, then the government is 100% within its right to garnish money from your wages or taxes. There can also be a salary offset for federal employees.

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How quickly can they garnish my wages or taxes?

By law, there is not much wiggle room between being current with your payments and being in default. As soon as you miss a payment by 30 days, a loan becomes delinquent. Then, if your loan payments are monthly, the loan goes into default after 270 days (9 months).

Fact: If your payments are on less than a monthly schedule (e.g. bi-monthly), default occurs after 330 days (11 months).

Once the loan goes into default, the government can start the process for garnishment. They have to send you a notice of garnishment or offset 30 days prior. If you don’t get things settled up in 30 days, then the garnishment or offset begins.

3 ways you can lose income

After you’ve defaulted, the government has three options for collecting what you owe:

1. Wage garnishment. The government can take 15 percent of every paycheck until your payments are brought current.
2. Tax refund intercept (AKA treasury offset). The government can withhold your entire federal income tax refund up to the amount you owe.
3. Federal salary offset. Employees of any federal agency can have 15 percent of their disposable income diverted to paying off your defaulted loans.

How to stop student loan garnishment

Question: I just received a letter stating my student loan that has been in default is to be offset. I am working. I’m also already facing wage garnishment for child support arrears. I barely make $11,000 a year and they garnish $300 each month for my arrears.

My question is: Can the government garnish my wages at the same time garnishment for my arrears ? Or will they wait until I pay my arrears off? If they don’t do that, I won’t have anything left to live on!

— Angie in Texas

Steve Rhode answers…

You are living through a tremendously stressful situation with your student loan debt, Angie. I wish I could wave a wand and make that pressure from the Federal Government vanish. What I can offer you is good information about how to stop student loan garnishment and a plan forward.

1. Look into an offset

An offset is typically a tax refund intercept, unless you’re also getting federal benefits like Social Security. The tax refund intercept is easy to deal with — just don’t get tax refunds. You should adjust your withholding, if any, to get more money in your pocket each month and not in a refund check. Thus, you can avoid the IRS intercept and you’ll have more money to cover your expenses each month.

2. Repayment plans

Now that’s a short-term solution. For more of a long-term solution on the federal loans, you can get into a $0 monthly payment plan that will prevent you from having defaulted loans. In fact, I just recently answered a reader question that dealt with this.

I’m not an attorney. You’d need to speak to an attorney licensed in Texas for specific legal advice, but it appears in Texas you can have up to a wage garnishment that’s up to 25 percent of your disposable income — but not more than 30 times the minimum wage.

If you did get a federal student loan wage garnishment, it would come in the form of a letter and be called an “Administrative Wage Garnishment.” Open it. The letter will instruct you on how to appeal the garnishment to hopefully get it suspended.

3. Modification

Texas will allow you to modify your mandatory child support garnishment if you can demonstrate the garnishment doesn’t allow you sufficient income to live on. To modify how much they garnish your wages,  talk to the court or a licensed attorney in Texas. Another solution may be to look into debt consolidation, which can include child support arrears.

FAQs about garnishment

Here are some common followup questions you may have:

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Steve RhodeAuthor

The Get Out Of Debt Guy