Student loan borrowers at risk of wage garnishment in January

The Trump administration will start garnishing the wages of student loan borrowers in default in early January, a spokesperson for the U.S. Department of Education confirmed to CNBC on Tuesday.

It will be the first time a portion of borrowers’ paychecks has been at risk since the beginning of the Covid pandemic, when collection activity was halted.

Starting the week of Jan. 7, the Education Department expects around 1,000 defaulted student loan borrowers to receive notices of administrative wage garnishment, the spokesperson said. After that, the number of notified borrowers will continue to increase.

The U.S. government has extraordinary collection powers on federal debts, and it can seize borrowers’ federal tax refunds, wages, and Social Security retirement and disability benefits.

The Education Department can seize up to 15% of a student loan holder’s after-tax income to put toward their debt. By law, borrowers must be left with at least 30 times the federal minimum hourly wage ($7.25) a week, which is $217.50, said higher education expert Mark Kantrowitz.

Student loan holders have been under pressure from a weakening labor market, a barrage of changes to the lending system and recent trouble accessing relief programs. More than 5 million student loan borrowers are currently in default, and that total could swell to roughly 10 million borrowers soon, the Education Department said earlier this year.

More than 42 million Americans hold student loans, and the outstanding debt exceeds $1.6 trillion.

To try and avoid wage garnishment, consumer advocates say student loan borrowers should contact the government’s Default Resolution Group and pursue a number of different avenues to get current on their loans, including signing up for loan rehabilitation.