Americans just had $176 million in wages garnished by the government due to unpaid student loans

By: Jillian Berman

Despite more programs available to federal student loan borrowers to manage their loans, borrowers are still struggling. In fact, between October 1 and December 31, 2015, private debt collection companies hired by the Department of Education garnished more than $176 million in wages from defaulted student loan borrowers in order to pay back their debts, according to data released last week.

Though the government provides a variety of options to help student loan borrowers manage their payments, it also has extraordinary powers — including wage garnishment — to collect on the debt if a borrower defaults.

There’s not much historical data on how much student loan debt collectors have secured through wage garnishment, so it’s hard to say whether there are fewer borrowers being subjected to wage garnishment than in previous years. The government did release similar data last year, which showed that the companies collected $170 million over the three months leading up to October of 2015. To be sure, these companies do collect more by other means — more than three quarters of the money the companies recovered for the Department came through rehabilitations, a process that allows defaulted borrowers to become current on their student loans after a series of on time payments.

Still, the sheer size of the pot taken from borrower’s wages is “horrifying” said Chris Hicks, an independent researcher who focuses on student debt. “These are people who can’t afford to pay their student loans and they’ve garnished $176 million in three months from them,” said Hicks, who also works as a consultant for progressive organizations. “You have to wonder what conditions people are living in when they’re seeing that much of their wages garnished.”

What’s more, the share of total borrowers who should be making payments on their loans, but are defaulting instead, hit its highest level in three years last quarter, according to an analysis of the data released last week by Jason Delisle, the director of the Federal Education Budget Project at New America, a Washington-based think tank.

Both the high levels of wage garnishment and default suggest that despite efforts from the Obama administration to make student loans more manageable for borrowers, a decent number are still struggling.

The share of borrowers with loans due, but are actually defaulting hit its highest level in three years last quarter, Delisle notes.

More than 336,000 borrowers entered default last quarter alone and more than 1 million borrowers entered default last year, according to the Department’s data. This is the first time the Department has released this metric, so it’s hard to say if it represents an improvement from previous years.

Hicks said he’s particularly concerned that it appears that tens of thousands of borrowers are entering default for the second time each quarter the Department measured. Borrowers who default more than once on their federal student loans have limited options to become current on their payments and get their financial lives back on track.

All of these defaults keep happening even as the Obama administration has made it easier for borrowers to make payments on their student loans tied to their income, a step which should theoretically prevent borrowers from defaulting. In its data release, The Department also noted that as of December 2015, nearly 4.6 million borrowers with direct loans were taking advantage of these programs, a 48% increase from a year earlier. This growth in uptake of these programs is partially responsible for the decline in the share of borrowers delinquent for 31 days or more from a year earlier.

Despite the uptick in use in income-driven payment programs, Hicks said the high levels of default suggest that servicers, the private companies that manage the repayment process, aren’t doing enough to make borrowers aware of their options. He also noted that many borrowers having their wages garnished likely qualify for very low monthly payments on income-driven plans and they may have defaulted and subsequently faced wage garnishment because they’re not aware of their other options. “It’s obviously too complex for people to figure out and the servicers aren’t doing a good job of helping people navigate it,” he said.

To make things easier, the government launched a new repayment program at the end of last year that allows any student loan borrower to cap monthly payments at 10% of her income. In addition, the Department, the Consumer Financial Protection Bureau and the Treasury Department signed a joint statement of principles on student loan servicing to better hold companies accountable for helping borrowers.

But from Delisile’s perspective, borrowers’ access to plans that help them manage their loan payments isn’t the issue. The increase in defaults combined with the jump in borrowers enrolled in income-driven programs indicates to him that offering a wide swath of income-driven plans may not be the best way to help the borrowers who are truly struggling, said Delisle. He said he doesn’t see a quick fix to this problem, but he feels policy makers should be considering “bold ideas” to address high levels of default that could include things like payroll withholding.

“The policy makers and what they want to do on student loans and what I see as the problems are two ships passing in the night,” he said.

Americans just had $176 million in wages garnished by the government due to unpaid student loans