Student Loan Garnishment? How Much of Your Income is Actually at Risk

Posted on February 19, 2019February 18, 2019 by Dawn Kennedy

Lots of news floating around about how a new legislative proposal where the federal government would take 10% of a student’s wages as an automatic payment for student loans, basically a garnishment, and this may affect many of the current 44 Million borrowers. This suggestion has drawn fire from many consumer law advocates, like myself, who feel that this plan would allow the government to prioritize student loan debt above necessary living expenses; food, utilities, shelter, and transportation. But this proposal also has me thinking about the state of current student loan garnishment structure.

Garnishment is simply a “forced” withholding of part of a consumer’s income in response to a debt. Federal Student Loans are subject to “administrative wage garnishment” and will not need a court order if the borrower is in default. The current percentage of wages which is subject to administrative wage garnishment is 15% of a borrower’s “disposable income”, defined as the net check, or income after withholding taxes and other deductions. But this 15% is after mandatory minimum amounts that are protected from any garnishment. I will cover both consumers earning regular wages, and then consumers on fixed Social Security income.

Please note that PRIVATE student loans require a court order and a judgement against the borrower before the lender can garnish. Also note that the total amount of garnishment for debt allowed by law is 25% of the debtor’s wages… meaning, I am going to talk at the 15% rate in this article, but if the consumer already has a garnishment from somewhere else, the total garnishment cannot exceed 25%, so the federal student loan garnishment may be less than the full 15%.

For Consumers Earning Wages

The rule is 15% of wages after deductions, but what exactly does that mean? First of all, there are minimum amounts that are “exempt from levy” meaning, that amount cannot be touched for any reason by federal student loan garnishment. The current amount, as of this article, is 30 times the minimum wage after deductions. This means, at the current minimum wage, which is at $7.25 an hour (15 USC §1673), the consumer “keeps” the first $217.50 per week. That is the amount “exempted” from any garnishment calculation. The government can then take the LESSER of either the amount that is left after the $217.50, OR 15% of the consumer’s total income. It can be confusing, so a few examples are in order.

A. Consumer’s net income is $300.00 per week. After the exempted $217.50, the consumer has $82.50 left over. 15% of the $300.00 is $45.00. The government can take the LESSER amount, or $45.00 per week. In perspective, out of $1200.00 net income per month, the government can take $180.00. (This is why us student loan/ consumer law types want to do everything possible within the law to prevent garnishment for student loan delinquency.)

B. Consumer’s net income is $500.00 per week. After the exempted $217.50, the consumer has $282.50. But, 15% of $500 is $75.00, so the LESSER is $75.00 a week, or $300.00 per month. Another ouch. This is one reason that over a certain threshold, the calculation is almost always just 15% of disposable income.

One more thing, both Federal Pension and Private Retirement payments that are exempted from garnishment for debts in most states, is also subject to garnishment for delinquent student loans.

For Consumers on Social Security Retirement and Social Security Disability

Unfortunately, most of the time when I run into the “offset” (garnishment) of social security payments, it is because the consumer co-signed someone else’s student loan. If the borrower becomes permanently disabled, there are administrative actions that can be taken towards forgiveness of the federal loan debt. This is true for federal loans where the student passes away as well. But there are many cases where the Department of Education is offsetting Social Security Retirement Income (SSRI) and Social Security Disability Income (SSDI) payments. SSI, the program for the indigent, is exempted from “offset”.

Social Security Retirement and Disability are subject to an “offset” to recover federal debts since 2001 under the “Debt Collection Improvement Act of 1996.” The Department of Education can offset up to 15% (31 USC §3716). The amount offset is the LESSER of 1. The total amount of the debt 2. The amount that exceeds $750.00 per month, OR 3. 15% of the total benefit amount.
Here are the actual examples from the legislation:

Example 1:
A debtor receives a monthly benefit payment of $850. The amount that is offset is the lesser of $127.50 (15% of 850) or $100 (the amount by which $850 exceeds $750). In this example, $100 would be offset.
Example 2:
A debtor receives a monthly benefit of $1250. The amount that is offset is the lesser of $187.50 (15% of 1250) or $500 (the amount by which 1250 exceeds 750). In this example, the offset amount is $187.50 (assuming the debt is $187.50 or more).
If the recipient receives $750 or less, nothing will be offset.

(from: 31 C.F.R. § 285.4(e)(3)(i), 31 C.F.R. § 285.4(e)(3)(ii), & 31 C.F.R. § 285.4(e)(3)(iii))

Alternatives to Default, Garnishment or Offset

I have covered in previous articles how dangerous it is to a consumer’s financial future if they default on student loans. There are currently nine, that is right, NINE repayment options available through the Department of Education for student loans, and while nobody qualifies for all of them, many qualify for more than two. So PLEASE readers, know your options. Please do not let your student loans go 269 days past due. Call your servicer or a student loan attorney if you need help. If you have private student loans, the payment options may be limited. But contact the lender if there is a problem making your payment. As for the topic that inspired this article, legislation proposing the 10% monthly payment option. You can see how it would begin to prevent defaults, and the amount proposed is less than the current garnishment scheme. But then again, I believe consumers should control their income and not have to choose between food and federal debts. A garnishment is imposed because federal student loan notices were ignored, or nine total monthly payments were missed in a row.

About Your Tax Refund

Posted on January 8, 2019February 8, 2019 by Dawn Kennedy

Somewhere around 80% of taxpayers get some sort of tax refund each year, and that was true again for 2017. The average refund amount was $2878.00. And while many people love to celebrate the lump sum when they get the check, the IRS shouldn’t be used as a savings account. Here are a few reasons why:

1. You could actually have the money to use throughout the year. If an employee paid every two weeks adjusted their withholding to be accurate as to what they really will owe, that average “refund” of $2787.00 becomes $110.00 in the paycheck every payday. This equates to roughly $220.00/ month into the household! With 78% of Americans living paycheck to paycheck, that is a big addition to the monthly budget.

2. The IRS controls the overpayment until they give it back. The IRS doesn’t pay interest on the extra amount you paid or allow you to access your own money until tax time. Once you have it withheld, or you send it in for the self-employed, it is in the IRS coffers until you file your tax return. And the government isn’t paying you any interest on the money they get to use until they have to refund the excess you gave them. In reality, you are losing control of your own income.

3. The cycle of debt/ pay with return is expensive. Many Americans go into debt throughout the year and pay off balances with a tax refund. This allows lenders to charge interest, even short term, and the debt is much more expensive than if the money was in your budget every month to use. An extra $220.00 a month can prevent the need to take on short term and expensive debt, especially if you use that money for an emergency fund.

It’s too late to affect your 2018 tax return and refund, because the 2018 tax year closed about a week ago on December 31st. But you can make changes now to bring home more money in each check, and to prevent a huge sum being refunded in 2019. Check your withholding, by checking your paystub, or ask HR. If you had a change in dependents such as a new baby, kid graduated and moved out, or got divorced, make sure the number of people you are paying taxes for is accurate.

For example, a family of four should be withholding properly for a family of four. One special note for a two-income family-the higher earner should be withholding the proper number of dependents; the second earner should claim zero. This prevents under withholding and a tax bill at the end of the year.

After your adjustments, enjoy the new sum in your paycheck, and for the first few months, why not squirrel the extra away in an account? You haven’t seen it regularly anyway. Only once a year in that government tax refund.

Budgeting for Two: You and Your Business

Posted on September 4, 2018February 8, 2019 by Dawn Kennedy

In a recent trend, I am learning that more and more entrepreneurs do not have a bright line separation between their business budget and their personal budget. And you NEED to have both. Separately. The written business budget is the plan to spend the businesses money. You need a business budget to know what you “must make” each month to cover all overhead and expenses. A personal written budget is the plan to spend your personal money. You need to make a written personal budget, so you know what your minimum “take home” salary needs to be. And yes, that “side hustle” is a small business, so even if it is “only” worked part-time, you must have a separate budget.

Once you know what the business needs to make and what you personally need to take home, you can prevent “co-mingling” your business and personal money. And it takes only a moment to fix: just write yourself a “reasonable salary” paycheck. On the personal side, after your paycheck, set aside the amount for your personal taxes. Have an accountant help you figure out your quarterly deposits but set aside each month (or each payday) towards your quarterly. Pay yourself on a regular basis (yes, for startups this can be hard). However, if you pay yourself a paycheck, on a regular cycle, you can budget personally.

If that sounds like an unnecessary “extra step” because it’s really all “your money anyway” you are skipping an opportunity to manage your finances better on both sides of the table. Many businesses have an “ebb and flow” of income and expenses. Proper budgeting allows for the buildup of a business emergency fund, the “management reserve” if you will. This is any money that the business has earned that is not needed for current expenses. This “extra” money, so to speak, should be set aside for lean months, when you are struggling to meet your minimums. By making yourself an expense, instead of just a “leftover” you know what you must do to make sure a regular paycheck comes in.

Why am I so adamant about this? Because we made this mistake early on as business owners. Using the business cash out of the till as it comes in, without tracking, can become a huge issue for taxes, as well as making overhead payments on time. What bills are you paying? Did you pay personal self-employment taxes on your draw? Do you know how much you’ve taken this week? Month? In fact, debt and taxes doom many small businesses. And you should know where it’s all going. This can be a huge challenge when you are just starting up, but you can make the decision early to schedule yourself in the budget, wait between paydays, and do not just write business checks for personal bills. Happy entrepreneuring!

Why is My Paycheck Short? I wasn’t Sued

Posted on August 14, 2018February 8, 2019 by Dawn Kennedy

When a debt is in default to a federal agency, notably student loans for many Americans, a debtor’s wages can be garnished without a lawsuit through a process known as “Administrative Wage Garnishment” (AWG). This process is different from garnishments based on having a judgment against someone after a lawsuit, because the Treasury does not need to obtain a court order to have an employer withhold up to15% of an employee’s “disposable income.”

Now, there are specific rules surrounding these processes to get you to pay back the debt. For example, an employee must be at the current job for at least 12 months, and the employee left the previous job involuntarily through something like a layoff. But generally, they can take your money, right out of your paycheck, without taking you to court. And it can be frustrating and scary because the agency is in control of the money, and you are short and have other bills to pay.

The Debt Management Service

The Debt Management Service and their Office of Debt Management (ODM) is basically the Treasury’s collection agency. In addition to AWG, there are other processes that can be used to collect on debts owed to the government, such as taking tax refunds to apply to debts, called an “offset.” If you are a Veteran receiving disability compensation, or a retiree, your money can be garnished to satisfy an ODM debt. In fact, your entire monthly disability compensation benefit can be taken. If you receive a Social Security check, and are, or your student borrower is, in default, they can garnish your social security check. Not kidding here.

This post is meant to be a strong reminder that nobody should ignore federal debts. Again, getting a letter from a government agency can be frightening. Period. The Internal Revenue Service (IRS) is the best known, and there are a ton of ads on tv for help with “tax debt.” But these other types of federal debt? Many people are surprised at the power these other agencies have. Not unlike the IRS.

If you are being garnished, and you do not owe a debt to the agency, my suggestion is to contact a lawyer immediately. You may be a victim of identity theft, or the treasury may have wrong information about the debtor, and you are unfortunately targeted. There are stories of two “John Smiths” with a single digit off on the Social Security or account number. Make sure you do not ignore the notices that you may think are just mistakes, you may end up with a paycheck surprise. Not in a good way.

Steps You Can (and should) Take

Student Loans- if you are more than a few months behind in payments, know that after 270 days they CAN intercept your tax return and garnish your wages. If you take steps, such as contacting the servicer, there are steps to take. If you are already in garnishment, get some legal or financial help to see what you need to do to “rehab” your account and stop the garnishment.

Other Federal Debts- similar advice, contact the Treasury Department in charge of collecting your debt, or get legal or financial help in dealing with the agency. For Veterans there may be an option for a waiver, or a payment plan so you receive a portion of your compensation while paying back principal debt.

Final tip. Remain calm and respectful. If you receive a letter, call the numbers on the letter. If not, here is the general contact site for the Treasury Collections Department. You can take back control of your money, even if you are being garnished by a government agency. Get a plan, get help if you need it, and you can get through it.

The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from The Law Office of Dawn K. Kennedy or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

What Have You Earned? What Have You Kept? Get your Social Security Statement

Posted on July 17, 2018February 8, 2019 by Dawn Kennedy

The federal government stopped mailing annual Social Security statements to everyone back in 2011. They are still available, but you have to use the internet. I don’t mention this earnings statement because I believe the Social Security program is solvent, or have a prediction whether it will be fixed, or even necessarily believe any “projected benefits” will ever be received by the time I am ready to retire. What the statement will tell you is how much you have earned each year, as reported to the Social Security Administration, since you started working and reporting income to the SSA.

We can go back (waaaay back) to 1990 and look at the average net income earned by average Americans over the last 26 years. The SSA reports $20,172.11 in 1990 and $46,640.94 in 2016. Meaning that for average Americans, we take home more than double each year now than we did in 1990. On the bottom of the SSA statement there is a number- your total earnings to date. In other words what you have earned over your working life.

If you worked and earned an average income from 1990-1999 you would have brought home about $209,056.00. From 2000-2009 about $351,192.00. And from 2010-2016 about $304,037.00. So, if we added the average net income earned and taken home by average Americans from 1990-2016, we get a mind blowing $864,289.00. Well over three quarters of a million dollars. And many people earn well above that annual average.

So, what do we KEEP? According to the latest statistics? Not much. Some of us have a 401k with auto withdrawal and a match at work. But, around 20% of those with a 401k have loans against the accounts taken to cover financial emergencies! Savings accounts are in bad shape as well, in 2017 about 57% of Americans have less than $1,000.00 in savings.

Where is it all going? To service debt. At various interest rates, for various reasons. Average Americans are paying their dollars to cars, homes, student loans, credit cards and personal loans. Excluding a mortgage payment, we send creditors a whopping $1181.00 per MONTH or $14,172.00 a year. Many Americans send much more than that to others.

It’s eye-opening, or at least it was for us. Debt is taking our income, payments that we can do other things with. Like save. Or pay cash for cool things. Or support organizations we feel strongly about. If you are ready to take back your income, you can start anytime. Even if you are still paying oodles of interest and have $1.87 in an IRA right now, its never too late to start. Its never too late to grab a hold of your hard-earned income with a plan to take back your earnings from the current situation.

If your income is flying away the moment after payday, it’s time to make it behave. Make a monthly budget and write down where each dollar goes. Give it a job. Be the smart boss over your hard-working money. Your money likes to have a job. “This month you little dollar, yes YOU, will pay the water bill! YAY!”. If you want an easy to use, free online budgeting tool, I recommend Every Dollar. Money stress really begins when you run out of dollars before you run out of jobs for them to do. Run out of jobs and reassign your money where you want it to work!