Student debt collection may be coming back: 5 steps to avoid wage garnishment

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The Department of Education is preparing to restart involuntary debt collections against student loan borrowers in default, according to recent media reports.

That means the government could soon start seizing funds from student borrowers with defaulted loans.

"One of the first avenues of recourse to reimburse the federal government is people getting their tax returns taken away and then credited towards the payment of the debt," said Jack Wallace, student loan expert and director at Yrefy. "Then the Treasury has the ability to garnish wages up to 15% … to satisfy repayment of the debt."

If collections restart, the two methods are known as the Treasury Offset Program, which withholds federal and state tax refunds as well as other federal payments, and Administrative Wage Garnishment, which affects borrowers' disposable income.

The Treasury Department, working alongside the Department of Education, is reportedly looking to hire private debt collectors to restart these collections. In response to a request for comment, the Department of Education told Yahoo Finance, "Involuntary collections remain paused."

Collections on defaulted loans have been paused since the start of the pandemic in March 2020. Earlier this year, the Education Department delayed the resumption of involuntary collections to give borrowers time to resolve their defaulted loans ahead of this year's student loan changes .

Now, more than 9.3 million borrowers in default may face involuntary withholding of their income or federal payments. "It's not a grant, it's not a scholarship — it was a federal student loan," Wallace said. "Loans you have to repay, and now it's time to pay the piper."

But there are still some actions borrowers can take to avoid collections.

How borrowers can avoid wage garnishment

For borrowers who have entered default on their student loans, taking action to get out of defaulted status can help avoid debt collection consequences like wage garnishment.

"The most important thing is people need to be proactive," Wallace said, including contacting your loan servicer and exploring your options on the Federal Student Aid website. He also referred borrowers to the recently launched Defaulted Loans Support Center from the Education Department and Treasury, which has resources for defaulted borrowers.

Here's a look at options for defaulted borrowers:

Ahead of any changes to the ongoing pause, the best thing defaulted borrowers can do is get out of default before collections begin. These are the primary options available today:

Loan rehabilitation is an option for getting out of default that can also remove the record of default from a borrower's credit history.

For Direct Loans, rehabilitation requires a written agreement to make nine on-time monthly payments. Borrowers must then make all nine payments within 10 consecutive months. The loan servicer determines the exact required payment amount based on the borrower's discretionary income. After those payments, your loan will no longer be in default, and you'll no longer be at risk of collections.

Consolidating a defaulted loan into a Direct Consolidation Loan is another option. To consolidate a loan after default, borrowers must agree to repay the new consolidation loan under an income-driven repayment plan.

As an alternative, borrowers can make three consecutive, on-time monthly payments toward the defaulted loan before consolidating. That payment amount is set by the loan servicer. Under this option, borrowers can choose any repayment plan for their new Direct Consolidation Loan after consolidating.

The final option for getting federal student loans out of default is paying them in full. This may not be possible for many borrowers in default, but a lump sum payment can help get loans out of default and avoid involuntary collections.

Involuntary collections, for now, are still paused. There are currently no wage garnishment or Treasury offset actions being taken against borrowers.

However, the Department of Education still offers information for avoiding garnishment and offset. Here's a look at some options for borrowers:

Before involuntary collections begin, borrowers in default will receive notice before their wages are garnished (30 days in advance) or that their federal benefits will be offset (65 days).

After receiving that notice, borrowers may have the option to set up a payment agreement with their loan servicer. The loans will stay in default, but you can establish a repayment agreement and begin paying before the date on the notice to avoid collections.

In some cases, borrowers may be able to argue a valid objection to avoid collections.

After receiving notice for a Treasury offset of federal benefits, borrowers can submit an objection or request for review by mail within the 65 days listed on the notice. You may object, for example, if "you don't owe the debt, you aren't behind on payments, you're currently in bankruptcy, or you are totally and permanently disabled," according to the Federal Student Aid site.

After receiving notice of wage garnishment, borrowers may request a hearing based on their objection by mail within 30 days of their notice. Objections that may qualify for a hearing and subsequent ruling include those based on the following reasons:

the "existence, amount, or enforceability of the debt"

garnishment that would leave you in "extreme financial hardship"

"you've been employed for less than 12 months after having previously been involuntarily separated from employment" so garnishment cannot be used

Borrowers must submit proof of their objection based on the existence, amount, or enforceability of their debt. The hearing will be arranged by the loan servicer and may be in person (at the borrower's cost to attend), by phone, or based on the documents submitted.

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