When Can Student Loans Garnish Your Bank Account?
Sep 05, 2022 By Susan Kelly

Lenders have the right to garnish your bank account in order to collect student loan debt. They can do this differently depending on whether you have federal or private student loans. Your wages won't be garnished unless you have defaulted on your student loans. This happens if you haven't made a payment for 180 days. Your student loans are automatically delinquent at this point. If you don't make any payments for the next 180 days, your loans will become the default. Your installment plan will no longer apply if you default on student loans. This could happen if your student loans are not paid on time.

Federal Student Loans

Federal student loans are not subject to a court order. The government can garnish your wages without a judgment or court order. In other cases, creditors must sue you in court to garnish your bank accounts. This is not required for creditors who are the owners of federal student loans. You will receive a notice from them giving you 30 days' notice that your wages have been garnished. You can then request a hearing before a judge to present your case.

Your wages can only be garnished if 15% of your disposable income is withheld. This is your net pay after taxes. These funds are withheld by your employer and sent to the creditor. This is usually a last resort procedure for those who refuse to pay their loans. For those who cannot pay, there are always payment options.

Private Student Loans

Private student loans or those not offered by the federal government do not qualify for wage garnishment. The creditor must first sue to obtain a judgment against you and then send a court order to your employer detailing the garnishment. The state where you live will determine how much they can garnish. Creditors can garnish up to 25% of your disposable income in some states. This is typically 25% of your earnings after you have paid 30 times the minimum wage or $217.50. Some income types cannot be garnished. Child support, social security payments, alimony, pension income and IRAs, 401 (k)s, and other retirement funds cannot be garnished.

Stopping Wage Garnishment

Stop wage garnishment by taking preventative action before your loans become late. Contact your loan servicer as soon as you realize you cannot make the payments. You have fewer options if your loans are in default. However, it is worth contacting your loan servicer to discuss how you can rehabilitate your loans. You may be able to stop a wage garnishment if you have been given a 30-day notice. Contact the collection agency to make payment arrangements. You can request a hearing to end garnishment that has already begun.

How To Stop A Bank Account From Being Garnished For Student Loan Judgments

There are two options to protect your bank account and home from garnishment after a judgment against your student loan debt.

  • Negotiate a payment with the judgment creditor. The debt collector will typically demand a lump-sum payment of at minimum 50% of the balance within 30 days. This amount of money is rare. Few people have the credit score necessary to be eligible for a personal loan.
  • Filing bankruptcy protects your bank accounts and a paycheck from garnishment by filing a Chapter 7 bankruptcy or Chapter 13 bankruptcy. You can also eliminate your credit card, medical, and other consumer debt. You will need to file an adversary proceeding to argue that student loan repayment will not cause undue hardship.

Tips For Avoiding Student Loan Default

A student loan default can quickly ruin your finances. This is even more true if a collection agency is involved. This is why it's important to avoid it. These are some tips to help:

  • Forbearance and deferment are available. However, most federal student loans have been granted forbearance by the coronavirus due to their inability to pay; private student loans and FFEL loans borrowers still need to make monthly payments. Ask your loan officer what your options are to suspend your payments temporarily.
  • You can apply for a repayment plan that is based on your income. The federal government offers a variety of options for lowering your monthly payments based on between 10-20% and 20% of your discretionary income. These plans also allow for loan forgiveness after making monthly payments for 20-25 years.