Student Loan Default and Wage Garnishment: How Employers Can Help

More borrowers are behind on their federal student loans than ever before. Per a new report from TransUnion, a record 31 percent of borrowers are past due on a payment by 90 or more days — and seeing their credit scores drop by an average of 60 points as a result. That’s bad enough news on its own — but now that the Department of Education (ED) has resumed collections activities on defaulted student loans, these borrowers risk even more severe consequences if they’re unable to catch up in time.

Background: student loan default crisis

Student loan default rates are ramping up: between February and April of this year, around six million borrowers entered delinquency — one-third of whom are likely to enter default in July.

So how did we get to this point?

In March 2020, a temporary moratorium froze federal student loan repayment activity — including monthly payments, delinquency, and default — to provide much-needed relief to borrowers struggling amid the economic impacts of the COVID-19 pandemic.

That moratorium was extended more than nine times over the next three and a half years, during which time multiple strategies for long-term support for borrowers (including widespread forgiveness and an ultra-affordable repayment plan) were proposed — but ultimately thwarted.

In the years since repayment resumed and without a sustainable policy change in place, millions of borrowers have struggled to keep up with their student loan bills, which average a whopping $536 per month. However, pandemic-era protections for borrowers in default remained in place until recently, when the Trump administration announced that involuntary collections, including wage garnishment, would resume for the first time in over five years.

Impacts of delinquency and default

Falling behind on student loan payments comes with significant repercussions that can take years to recover from — and in the meantime, create barriers to everything from housing to job opportunities.

Borrowers are considered delinquent if they’re late on a federal student loan payment by even one day. After 90 days of nonpayment, their delinquency is reported to credit bureaus — a milestone that comes with a severe hit to the borrower’s credit score.

After a borrower has been delinquent for 270 days, they enter default, at which point they face consequences including additional credit score damage and involuntary collections, methods for which include property liens, tax refund withholding, legal action, and, most commonly, wage garnishment.

Wage garnishment

Once a federal student loan borrower enters default, ED may pursue collections via wage garnishment, through which ED goes through the borrower’s employer to collect up to 15 percent of the borrower’s disposable income until the outstanding balance is repaid.

The financial impacts of wage garnishment on borrowers, their families, and the economy are severe. But the effects are more than just wallet-deep: the process shines a very public spotlight on employees’ private financial struggles, escalating the stress, shame, and anxiety commonly experienced by workers with student debt to new heights.

Employers’ role in wage garnishment for defaulted student loans is also far from ideal. Not only does fulfilling ED requests for wage garnishment place HR departments in an uncomfortable intermediary role — the operational complexity required to facilitate the process drives significant administrative burden that can quickly distract and derail HR teams from reaching their business objectives. Plus, wage garnishment can open the door for compliance concerns, since employers can be held liable and penalized for any errors in their administration of the process.

How to help

Employers have a critical role to play in supporting employees facing student loan delinquency and default. By offering benefits that help workers navigate these challenges, employers can:

• Drive real, meaningful support at a moment when millions are facing a personal financial wellness crisis
• Reduce employees’ financial stress to improve engagement, performance, and retention
• Avoid the hefty administrative burden created by facilitating wage garnishment

Candidly delivers the benefit solutions employers need to offer meaningful, impactful support amid the student debt default crisis and beyond.

• Our Core platform drives immediate impact with self-guided tools and resources that can help employees make their monthly payment more manageable and help them understand their options if they become delinquent or default on their student loans.
• Through our Coaching service, employees can schedule one-on-one sessions with certified Coaches who can offer trusted, personalized guidance for keeping up with payments, navigating default and delinquency, balancing student loan repayment with other financial goals, and more.
• Premium offerings like our Employer Contributions and Student Loan Retirement Match enable employers to deliver additional support that helps employees get ahead on student loan repayment and build towards future financial security — all while supercharging benefit utilization and engagement.

Want to learn more? Reach out to our team at sales@getcandidly.com to learn about strategies helping your employees navigate student loan repayment, delinquency, and default.