Salary payment is messed up: Starting and stopping salary cuts is more difficult than it seems. Borrowers who work for employers that use large payroll processors like ADP, Gusto, or Paychex typically see garnishment orders applied (and issued) within the same pay cycle as the paperwork progresses through the system.
But millions of Americans still work for small employers that handle payroll through a local accounting firm or cut checks by hand. For those workers, it can take several weeks for a garnishment order to be initiated, a backlog can build up, and the same amount of time to stall once a borrower is rehabilitated or consolidated.
The gap means borrowers could lose 15% of each paycheck even after the loan is technically out of default. We saw this happen when Covid first stopped decorating – few employees were Reporting delay in closing decoration. And getting a refund was also challenging.
Decoration is more expensive than repayment: Payroll is a far more expensive way to repay federal student loans than any active repayment plan. The department can take up to 15% of disposable wages through AWG, while the new Repayment Assistance Scheme (RAP) caps payments at around 10% of discretionary income, and IBR caps payments at 10% for new borrowers.
That difference alone could mean borrowers pay up to 50% more per month than in an income-driven plan – without any forgiveness credits.
Garnishment is also rarely the only collection tool in the game. The Treasury offset program can seize tax refunds, Social Security benefits and other federal payments at the same time.
And once a loan defaults, collection costs are added on top of the balance, with most of that money taken from paychecks or tax refunds applied to collection fees and interest earned before the principal balance. The result is what College Investor calls a “fiscal death spiral” – no matter how much the government collects, the loan balance barely grows and all the money borrowed from you is effectively wasted.
What borrowers can do: There are two main options for stopping or stopping decoration:
- Loan Rehabilitation: Nine timely payments based on income brings the loan out of default and removes the default mark from the credit report.
- Direct Consolidation: Combines defaulted loans into one new loan, and requires enrollment in an income-driven repayment plan, but the default remains on your credit report.
How it connects: College Investor has tracked default risk since the on-ramp ended, and our reporting shows that the most at-risk borrowers are those most likely to miss the forbearance transition to the SAVE plan. With more than 7 million SAVE borrowers removed from that plan, the risk of slipping into default could increase.
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