Paycheck Pain: What Employers Need to Know About Student Loan Garnishment

The Trump administration is resuming wage garnishment for defaulted student loans starting May 5, 2025, with employers required to withhold up to 15% of employees’ disposable income. Small and mid-market businesses face significant administrative responsibilities including calculating garnishment amounts, processing deductions, and maintaining documentation, with estimated costs of 1-2 hours of staff time for initial setup and 15-30 minutes per affected employee each pay period.

Unlike most debt collection, federal student loan garnishment requires no court order, making implementation immediate once employers receive notice. Businesses that fail to comply face substantial liability risks, potentially becoming responsible for the employee’s entire debt plus penalties.

The policy affects roughly 5.3 million defaulted borrowers now, with nearly 4 million more at risk of default in coming months.

The Policy Evolution and Current Implementation

The concept of garnishing student loan payments directly from paychecks first emerged in February 2019, when then-Senator Lamar Alexander proposed it as part of reauthorizing the Higher Education Act. That original proposal called for a universal withholding system for all federal student loan borrowers, offering two options: an income-driven plan capping payments at 10% of discretionary income or a standard 10-year repayment plan.

While that proposal never became law, the current Trump administration announced in April 2025 that collection efforts on defaulted federal student loans would resume after a five-year pause that began during the COVID-19 pandemic. This implementation differs significantly from the 2019 proposal:

• The current policy applies only to defaulted loans (typically 270+ days delinquent)
• It follows administrative wage garnishment procedures established in the Debt Collection Improvement Act of 1996
• Collections through the Treasury Offset Program began May 5, 2025
• Wage garnishment notices will be sent to employers “later this summer”

The Department of Education maintains that resuming collections is not discretionary but required by the Higher Education Act. Education Secretary Linda McMahon stated that “American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies.”

Employer Responsibilities and Implementation Mechanics

When an employer receives a student loan wage garnishment order, they face several mandated responsibilities:

Immediate Responsibilities

• Process garnishment orders as soon as received (no court order required)
• Calculate the employee’s “disposable earnings” (gross pay minus legally required deductions like taxes)
• Withhold up to 15% of disposable income
• Notify affected employees about the garnishment
• Begin withholding from the next available pay period
• Send garnished funds to the agency specified in the order

Ongoing Requirements

• Continue garnishment until receiving an official release or the debt is paid
• Recalculate withholding if employee income changes
• Maintain proper documentation of all garnishment activities
• Ensure total garnishments don’t exceed legal limits (25% across all garnishments in most cases)
• Manage priority order if multiple garnishments exist

The process differs from typical debt collection garnishments in critical ways. Most significantly, federal student loan garnishment is an administrative wage garnishment that doesn’t require judicial process. This means employers must implement these orders immediately upon receipt, with no court validation required.

Administrative Burden and Costs for Small/Mid-Market Businesses

Small and mid-market businesses bear disproportionate burdens from wage garnishment requirements due to limited administrative resources and less sophisticated payroll systems.

Time Requirements

The administrative work includes:

• 1-2 hours of staff time for initial processing of each garnishment order
• 15-30 minutes per affected employee each pay period for ongoing maintenance
• Additional time for addressing employee questions and concerns

Small businesses face higher garnishment rates (13%) than large firms (8.7%), according to ADP Research Institute data, meaning they often handle more garnishments with fewer resources.

Financial Costs

While exact costs vary by business size and number of affected employees, expenses typically include:

• Staff time costs (payroll/HR personnel diverting from core functions)
• Potential investment in payroll system upgrades
• Legal consultation expenses
• Administrative fees (some states allow employers to charge employees $1-10 per payment)
• Potential liability costs if garnishment orders aren’t processed correctly

For a small business with 25 employees and 3 garnishment orders, this could translate to approximately 6-8 hours of initial setup time plus 1-2 hours per pay period for ongoing maintenance—significant for operations with limited administrative staff.

Compliance Risks

The most severe cost comes from non-compliance. Employers who fail to properly implement garnishment orders can be held liable for the entire amount that should have been withheld, plus potential penalties and interest. For businesses processing multiple student loan garnishments, this represents substantial financial risk.

Timeline and Implementation Challenges

The current timeline creates several challenges for employers:

• The Treasury Offset Program (seizing tax refunds, certain federal benefits) resumed May 5, 2025
• Wage garnishment notices will be sent to employers “later this summer”
• Approximately 5.3 million borrowers are currently in default, with nearly 4 million more at risk
• Employers may face a sudden influx of garnishment orders with minimal preparation time

This compressed timeline coincides with other significant challenges:

• The Department of Education is reducing staff by approximately 50%
• Student loan management is transitioning from the Department of Education to the Small Business Administration
• Many businesses face other economic pressures from inflation and tariffs

The administration has not announced any implementation assistance programs for affected employers despite the sudden resumption of collections.

Reasoning and Context for the Policy Shift

The Trump administration presents several justifications for resuming wage garnishment:

• Fiscal responsibility: Officials argue taxpayers should not continue bearing costs of nonrepayment
• Legal requirement: The administration maintains the Higher Education Act requires them to pursue collections
• Normalizing operations: Officials frame this as returning to standard practice after an extended pandemic pause
• Deterrent effect: Research suggests potential garnishment can motivate some borrowers to seek repayment options

Critics counter that the timing is problematic amid economic pressures, and that more effective alternatives exist, such as expanded income-driven repayment options.

Federal vs. Private Student Loan Treatment

The enforcement mechanisms differ significantly between federal and private student loans:

Aspect	Federal Student Loans	Private Student Loans
Legal process	Administrative wage garnishment without court order	Requires lawsuit, judgment, and court order
Garnishment limit	Up to 15% of disposable income	Up to 25% of disposable income (varies by state)
Default timeline	270 days of missed payments	Often 90 days of missed payments
Notice requirement	30-day notice before garnishment	Varies by state law
Additional collection	Tax refund offsets, Social Security reduction	Limited to wage garnishment and asset seizure
Protected income	Some federal benefits partially protected	Social Security and disability typically fully protected

For employers, the key difference is that federal loan garnishments arrive directly from the Department of Education with no court validation required, while private loan garnishments must first go through judicial process, potentially giving employers more time to prepare.

Precedents for Similar Wage Garnishment Systems

The current policy builds on established legal frameworks:

• Higher Education Act of 1965 (Section 488A): Authorized garnishment up to 10% of disposable pay for defaulted student loans
• Debt Collection Improvement Act of 1996: Expanded authority to 15% and standardized administrative wage garnishment procedures
• Consumer Credit Protection Act: Provides general protections for all wage garnishment (maximum 25% total garnishment, employment protection)

The Department of Education has successfully implemented wage garnishment for student loans for over 20 years. Many of the debt collection mechanisms in current use were modeled after the Department’s existing practices.

Other similar systems include:

• IRS wage levies for tax debts
• Child support wage withholding
• Bankruptcy-related wage earner plans

Expert Opinions on Feasibility and Impact

Experts offer varied perspectives on the policy’s implementation and effects:

On Feasibility

• Mark Kantrowitz, higher education expert, questions the accelerated timeline: “It sounds like they are not pursuing the normal due diligence schedule for collecting defaulted federal student loans.” (CNBC)

On Economic Impact

• Pew Research found 79% of borrowers who experienced wage garnishment reported it had a “major” financial impact, more severe than other consequences of default. (Pew Trust)
• Federal Reserve projections suggest borrowers with delinquencies could see credit scores fall by up to 171 points, affecting their ability to secure housing and transportation. (CNBC)
• Mike Pierce, executive director of the Student Borrower Protection Center, warns: “This will further fan the flames of economic chaos for working families across this country.” (Student Borrower Protection Center)

On Business Impact

• Small business advocates note the disproportionate burden on smaller operations without dedicated compliance resources.
• Scott Buchanan, executive director of the Student Loan Servicing Alliance, emphasizes proactive approaches: “Most borrowers…they’re not in danger of default today, but in five months, they could be. Taking action today is pretty important.” (NEPM)

Conclusion

The resumption of student loan wage garnishment represents a significant administrative challenge for employers, particularly small and mid-market businesses. While the legal framework for these garnishments is well-established, the sudden implementation after a five-year pause creates operational burdens with minimal preparation time. Small businesses face disproportionate impacts due to limited administrative resources, higher garnishment rates, and potential liability risks. For affected employers, developing clear internal processes, ensuring payroll systems can handle garnishment calculations, and documenting all actions will be crucial to navigating this policy shift without incurring significant costs or liability exposure.