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Direct to Consumer Student Loans
If you’re not familiar with how student loans work, you might be expecting a big check in the mail after being approved. But in most cases, the school you’re attending is actually in charge of managing those funds.
Read on for a more in-depth explanation of student loan disbursal, including situations where student loan funds may be distributed directly to the borrower.
Student loans paid directly to a student
There are two ways that a student loan can be disbursed: direct-to-consumer or school-channel. A direct-to-consumer loan is when the lender sends borrowed funds directly to the student. A school-channel loan is when the lender sends the funds to the college or university.
All federal student loans and most private loans are school-channel loans. If there is money left over after tuition, fees, and other necessary expenses have been paid, the student may receive those extra funds as a check or bank deposit. If you end up receiving extra funds, you generally should use them for expenses related to your education or necessary living expenses, like buying groceries, textbooks, or software.
Direct-to-consumer loans often have higher interest rates and fees because the money is going directly to the student instead of the institution.
Students are still required to report how much they receive in direct-to-consumer loans to the financial aid department at their school. The department will use those figures to determine how much aid a student qualifies for. Taking out too much in direct-to-consumer loans can cause you to lose eligibility for other types of funding.
Income disbursement from a work-study job
Work study is a type of aid offered to students who qualify based on financial need. With work study, students get a job on campus or with an organization affiliated with the school. They usually work between 10 and 15 hours a week and are paid minimum wage or slightly more.
The money a student earns is sent to them directly, and they can use it to cover textbooks, living expenses, or anything else related to school or not.
Employers may pay students with a physical check or directly deposit the funds into a bank account, just like with a traditional job. However, students can also request that the money be sent directly to the school to pay for tuition or other expenses. The payment frequency for a work-study job depends on the provider but is usually every two weeks.
How student loan disbursement works
Federal student loans are disbursed to the school before the beginning of the semester. Students are notified when disbursal occurs. If you don’t receive a notice about disbursement, make sure your contact information is correctly listed on your Federal Student Aid (FSA) online account.
The money is applied to tuition, fees, and other school-related expenses. If you’re living on campus, the loan funds may be used to pay for room and board. If you’re taking lab classes, they may be used to pay lab fees. Parking permits and optional cafeteria plans may also be covered by your loan funds.
Most lenders pay schools first because it’s easier for both the school and the student. A student doesn’t have to worry about transferring large amounts of money, and the school doesn’t have to worry about getting paid on time.
Before your first federal student loan is disbursed, you have to complete entrance counseling. Entrance counseling helps you understand how student loans work, what the terms mean, how interest is calculated, and more. The U.S. Department of Education requires just one 30-minute online session, but your school may require additional counseling.
Returning student loans
If you receive extra funds that you don’t need, you may be able to return them and avoid paying interest. The time frame for when you can return those funds depends on the lender.
For federal student loans, you can cancel all or part of the loan 120 days after receiving it and no interest or fees will be charged.
If you take out private student loans and want to return the money, contact the lender directly. It’s usually harder to return money to a private lender. In this case, your best option is to keep the money to use for future expenses and ask for a lower loan amount next semester.
Student loan debt is a serious issue. In fact, it’s the only kind of debt that cannot be discharged in bankruptcy. As such, it can be a real burden for borrowers who are struggling to pay back their loans.
Unfortunately, not all student loans are created equal. Some lenders allow borrowers to take advantage of income-driven repayment plans (IDRPs), which cap monthly payments at an affordable percentage of their income and extend the repayment period from 10 years to 20 or 25 years (or even longer). But other lenders don’t offer these plans—and they might even prevent you from making payments on time because they don’t have enough money in your bank account to cover them.
When this happens, many borrowers assume that their accounts have been frozen or closed due to fraud—but this isn’t always the case! Sometimes, payments are simply being held until the next month’s paycheck comes through and there’s enough money available in the account to cover them. However, this means that there may be a lag between when your employer sends your paycheck information to your lender and when they actually post it—which can result in late fees or penalties if you try paying early
What Is Garnishment?
Garnishment occurs when a creditor takes money from your paycheck, bank account, tax refund, or other federal benefits. (Technically, when money is taken from an account as opposed to a paycheck, it is called a levy.)
Once your loan is in default, creditors have the right to go to court in an effort to get the money you owe them. If you refuse to pay them directly, that money can be taken from you. Wage garnishment is the most common, but, if that fails, you may have your bank accounts frozen as money is transferred.
Are There Any Exceptions to Wage Garnishment?
There are limits to how much can be garnished, as well as limits on what funds can be taken.
Some funds that are typically exempt from garnishment include the following:
- Social Security and SSI benefits
- Veterans’ benefits
- Disability benefits
- Certain retirement benefits, including federal and civil service retirement, railroad retirement, and foreign service retirement
- FEMA disaster assistance
However, if you have defaulted on federal student loans, even the funds listed above may not be safe.
Wage garnishment is typically limited to the lesser of 25% of your disposable earnings or the difference between your disposable earnings and 30 times the federal minimum wage.
If you have defaulted on a federal loan, then 15% of your disposable earnings may be garnished.
can student loans take money from your bank account
If you are struggling with making your student loan payments, you are not alone. Student loan debt has been ballooning over the past several years, and about 10% of all borrowers are more than 90 days delinquent.
If you haven’t been making your payments, it’s likely because you can’t spare the funds to do so. If that’s the case, the idea that funds could be taken from your wages or your bank account can be very frightening.
However, there is a very long path between missing a payment and ending up with “wage garnishment” or a bank levy, and there are many chances for redemption along the way.
Delinquency and Default
Your loan becomes delinquent on the first day you miss a payment, and it will remain delinquent until you make the payment or make other arrangements.
For federal loans, credit bureaus are notified after 90 days of delinquency. Private lenders may report delinquency as early as 30 days. This can make it difficult to get credit elsewhere or result in higher interest rates on future sources of credit or loans.
Direct Loans and FFEL Loans graduate from delinquency to default if you miss a payment for 270 days. Lenders typically wait until the end of a 90-day period to file a default claim, which means you may, in actuality, have 360 days after a missed payment before entering default. Private student loans are in default after 120 days of delinquency.
When you default, the full balance and all fees and unpaid interest are due immediately. For federal loans, you lose your eligibility for programs like forbearance or other payment arrangements and you can no longer get federal student aid.
In addition, collections fees may be tacked onto the balance. The amount of these fees vary by loan but are as much as 25% for FFEL and Federal Direct Loans.
how do debt collectors find your bank account
How a Debt Collector Gets Access to Your Bank Account
A debt collector gains access to your bank account through a legal process called garnishment.
If one of your debts goes unpaid, a creditor—or a debt collector that it hires—may obtain a court order to freeze your bank account and pull out money to cover the debt. The court order itself is known as a garnishment. The court order normally comes after a debt collector sues you and then wins a judgment against you.
Debts that may be affected include credit card bills, auto loan payments, personal loan payments, medical bills and mortgage payments.
In addition to garnishing a bank account, a debt collector may be able to garnish your wages. This happens when a debt collector secures a court order requiring your employer to subtract wages from your paycheck to cover an unpaid debt.
Four states—North Carolina, Pennsylvania, South Carolina and Texas—don’t allow wage garnishment for consumer debt. If you live in one of those states, a debt collector can still essentially garnish your wages by garnishing your bank account, though. Once your wages are deposited into your bank account, they aren’t considered wages anymore. Therefore, a debt collector may be able to tap into your account and take your money—including money from your paycheck.
Federal Student Loans vs. Private Loans
How the process of garnishment is initiated depends on whether your student loans were federal or private.
If you default on a private loan, the lender is required to go to court, prove that you are in default and that they have made every effort to get you to pay, and get issued a court order before they can take money from your wages or bank accounts.
If you default on a federal loan, however, there is no court order requirement. It’s worth noting that, in the event of a federal loan default, nothing is likely to happen until a full year after your first missed payment – you will have received several notifications and attempts at remedy beforehand. They also tend to garnish wages before trying to freeze assets and bank accounts (in fact, the latter almost never happens except in extreme cases).
Unlike private lenders, the federal government can enact a treasury offset, in which they take what they are owed from your tax refund, Social Security payments, or other monies paid to you by the U.S. Department of the Treasury.
How Will I Know If I’m Going to Be Garnished?
If your wages are garnished, the notice is actually sent to your employer. They are notified that your wages are to be garnished and that they are legally required to send the appropriate portion of your wages to the collections agency. You should be aware that this is happening well in advance, however, because you will have been notified about the preceding court case and given time to contest it.
For federal student loans (for which no court order is required), you will be notified in writing at least 30 days before garnishment begins and be informed of the amount you owe and how to request records or a hearing.
The same applies to bank levies. You will either receive notice from the government or you will be made aware of the court case brought against you beforehand.
What Can I Do If My Wages Are Garnished?
The best way to deal with a levy or garnishment is to avoid it in the first place. (Details on how to do so are in the next section.) If you do end up in the position where a garnishment is in place and money is scheduled to be taken from you, there are still actions you can take.
- Dispute the garnishment: If you believe the amount they are trying to take is incorrect or you weren’t given proper notice, you can go to court to dispute it. Depending on laws in your state, you may even be able to get the garnishment lifted or reduced if you can prove financial hardship.
- File bankruptcy: While filing bankruptcy won’t necessarily free you from student loan debt, it can put the collections process on hold while you sort out your finances and make arrangements.
- Contact the collections agency or creditor: You may still be able to make contact and attempt to negotiate a payment plan or a debt settlement.
- Provide proof that funds are protected: As mentioned previously, certain funds are exempt from garnishment or levy. If you can prove these are the funds in your bank account, then you might be able to keep them safe.
Other grounds for dispute is if the statute of limitations has expired. For private loans, this limit is typically about six years, but it varies from state to state. Federal loans, however, do not have any such limitations.
How to Avoid Defaulting on Your Student Loans
If you are facing financial difficulties and are unable to make a student loan payment as a result, the best thing you can do is contact your loan servicer immediately and let them know. There are many options in place for handling such situations, especially if the loan is from the U.S. Department of Education.
Depending on your situation or degree of financial hardship, any or all of the following might be possible:
- Forbearance: A temporary period of time where you do not need to make any payments. Your loan account remains current, your credit remains in good standing, and you can get back on track once your finances are more secure.
- Deferment: If you are attending school or are in the military, you might be able to apply for loan deferment. This is similar to forbearance in that it allows a period of time during which you do not need to make payments, but you do not need to prove financial hardship to qualify.
- Rate reduction programs: Some services provide rate reduction programs where those at risk for default can apply to make payments at a much lower interest rate for a short period of time.
- Change your payment plan: You may be able to reduce your monthly payments by extending the term of your loan, changing to an income-contingent plan, or using a graduated payment plan.
- Refinance: You might be able to lower your monthly payments by consolidating or refinancing your loan at a lower rate.
Student loans can take money from your bank account, but only if you’ve agreed to it. The way that student loans work is that they take a certain amount of money out of your paycheck each month, and the amount that they take varies depending on how much money you make. If you don’t pay your student loans, they will take more money out each month until it’s paid off—but they can’t just take anything they want. They have to get approval from a court first, and then only after that approval is given can they begin taking funds from your bank account.
It’s important to remember that student loans are different from other forms of debt because there are protections built into them for borrowers who are struggling to pay back their debts. If you think that you might be having trouble making payments on your student loans or any other type of debt, talk with a lawyer about what options might be available for you.
Getting Ahead of the Game
As the saying goes, “An ounce of prevention is worth a pound of cure.” The best way to prevent garnishment or bank levy is to not go into default in the first place. In fact, this doesn’t just benefit you – your lender likely prefers working something out with you, instead.
Whether you’re already in delinquency, default, or just anticipating the worst, our team of experts at CollegeFinance has your back. To learn more about the consequences of not paying your loans as well as other related topics, check out our most recent guides and articles available online today.
Direct-To-Consumer Student Loans
Student loan wage garnishment is when student loan servicers collect a portion of your paycheck to pay down a defaulted student loan — up to 25 percent of your disposable pay, depending on the type of loan. Wage garnishment can happen if you’ve missed several student loan payments, and it may continue until your loan is paid in full or the default status is resolved.
If you’re in danger of falling behind on your student loans, here’s what to know and how to prepare.
What is student loan wage garnishment?
Wage garnishment takes place when a loan holder orders your employer to withhold a percentage of your pay to repay past-due student loan balances. For federal loans, you must have missed nine months of payments before the government can garnish your wages, although this may vary for private loans.
Garnishment is used to try to get student loans paid back. With federal student loans, wage garnishment can take place without your servicer taking you to court. However, most states require loan holders to obtain a court order to garnish your wages if you default on private student loans.
With federal student loans, wage garnishment can continue until your loan balances plus interest and fees are paid back, but it can also end if your loan is removed from default. The U.S. Department of Education has stalled wage garnishment on all defaulted federal loans through the payment pause, which is currently set to expire no later than 60 days after June 30, 2023. Plus, all federal loans will be returned to good standing status once payments resume.
How much can be garnished for student loans?
Generally, loan holders can garnish up to 15 percent of your disposable pay to repay federal student loans and up to 25 percent to repay private student loans.
These are aggregate limits. That is, if you default on multiple loans held by multiple companies, the garnishments they place on your income cannot add up to more than the limit.
However, these limits can vary by state.
How to stop student loan wage garnishment
You have rights around wage garnishment when it comes to federal student loans. For example, you have the right to be sent a notice from the U.S. Department of Education that explains its plans to garnish your wages in 30 days, as well as the information regarding your debts. You also have the right to see records relating to your student loan debt.
Additionally, there are plenty of steps you can take to avoid wage garnishment on defaulted student loans.
Enter into a voluntary repayment agreement
To avoid wage garnishment relating to federal student loans, you can negotiate repayment terms with the U.S. Department of Education or the collection agency assigned to your account. For this to work, however, you have to ensure that your first payment is made no later than 30 days from the day the wage garnishment notice was sent.
Entering into a voluntary repayment agreement is the first step you should take to get back on track and to eventually get your federal student loans out of default. Eventually, though, you could also consider loan rehabilitation or loan consolidation.
With loan rehabilitation, you are asked to sign an agreement to make nine on-time monthly payments based on your income over a period of 10 consecutive months.
To consolidate defaulted federal student loans, you must either sign up for a new income-driven repayment plan or make three consecutive, on-time, full monthly payments on the defaulted loan.
Private lenders may also be willing to negotiate a repayment agreement or a loan settlement. Contact your lender for more information, as the requirements and availability will vary from lender to lender.
Object to garnishment and request a hearing
With federal student loans, you may also decide to object to wage garnishment and ask for an official hearing. This could be your best option if you do not agree about owing the student loan debt you’re being asked to pay, if you disagree with the amount or if you believe you weren’t properly notified about the garnishment.
You may also ask for a hearing if you believe that wage garnishment could create an extreme financial hardship in your life, or if you have been employed for less than 12 months after losing a previous job.
In any case, you must make a request for a hearing in writing and ensure that it is postmarked no later than 30 days from the date the wage garnishment notification was sent. You also have to provide proof to support your objections to the debt or the garnishment and pay for your own legal representation for an in-person hearing. Many organizations offer help navigating this system, either free or for a fee.
If your hearing is successful, either your wages won’t be garnished for a 12-month period or you may qualify for a partial (reduced) garnishment. If your hearing is unsuccessful, your wages will be garnished at 15 percent of your disposable income.
Tips for avoiding student loan default
Student loan default can quickly become a costly mess, and that’s especially true once a collection agency gets involved. As a result, your best bet is avoiding default at all costs if you can.
If you’re worried about the future repayment of your student loans, here are some tips that can help:
- Look into deferment and forbearance. While federal student loans don’t require any payments until mid-2023, thanks to the coronavirus forbearance period, you may be able to apply for additional deferment or forbearance options after that date. The federal government has several of these options available, and you can learn what options you have on your private loans by reaching out to your lender.
- Switch repayment plans to get a lower monthly payment. Several repayment plans are available for federal student loans, including extended repayment plans that can last up to 30 years. You may be able to get a lower monthly payment if you opt for a longer repayment term.
- Switch to an income-driven repayment plan. Income-driven repayment plans let you pay a percentage of your discretionary income toward federal loans for 20 to 25 years, at which point the remaining loan balances are forgiven. Considering your monthly payment could be as low as $0 on these plans, they can be a good option for borrowers with low incomes who are struggling to repay their loans.
- Refinance your student loans. Consider refinancing your student loans to get a lower interest rate, a lower monthly payment or both. Just remember that refinancing federal loans with a private lender means giving up federal protections like deferment, forbearance and access to income-driven repayment plans.
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