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What is a Reasonable and Affordable Monthly Payment for a Defaulted Borrower to Regain Federal Student Aid Eligibility?

I am 26 years old and would like to go back to college. I have $12,000 in student loans which are currently in administrative wage garnishment. I make $27,000 a year and would like to get my loans back in good standing. I have called the collection agency in charge of my loan and they insist on me paying $120 extra on top of the already $350 garnished a month. Is there any way I can get the $120 reduced to something more affordable for me to allow me to go back to college? — A. D.

Administrative wage garnishment on a defaulted federal student loan may not exceed 15% of the borrower’s disposable income without the written consent of the borrower, per section 488A(a)(1) of the Higher Education Act of 1965 and the regulations at 34 CFR 682.401(b)(9). Disposable income is defined by section 488A(e) of the Higher Education Act of 1965 and the regulations at 34 CFR 682.200(b) as the income that remains after deducting any amounts required by law to be withheld. Amounts required by law to be withheld include federal, state and local taxes, FICA taxes and other wage garnishment payments.

In addition, 15 USC 1673 requires that the weekly wage garnishment amount leave the borrower with at least 30 times the federal minimum hourly wage. The current federal minimum wage as specified in 29 USC 206(a)(1) has been $7.25 an hour since July 24, 2009. That means borrowers subjected to administrative wage garnishment on their federal student loans must be left with at least $217.50 a week, $942.50 per month and $11,310 per year. These figures are barely above the poverty line.

$350 a month in wage garnishment on a $27,000 annual salary appears to exceed the 15% of disposable income limit on wage garnishment. Federal income tax is about 6.5% of adjusted gross income (AGI) for AGI between $25,000 and $30,000. FICA taxes are 7.65% of gross income. These taxes along with state income tax represent approximately 14% of gross income. The $350 monthly wage garnishment amount appears to be about 18% of disposable income. It is possible that the wage garnishment amount was incorrectly calculated based on gross income instead of disposable income.

A borrower who is in default on a federal education loan may regain eligibility for federal student aid by making six consecutive, on-time (within 15 days of the due date), voluntary full monthly payments on the defaulted loans, per the definition of “Satisfactory repayment arrangement” in the regulations at 34 CFR 682.200(b) and the regulations at 34 CFR 682.401(b)(4). This is a one-time opportunity.

Voluntary payments do not include any amounts paid through wage garnishment and the offset of income tax refunds. In most cases the collection agencies will want to receive an additional payment on top of the wage garnishment, and it is not uncommon for them to ask for 1% of the outstanding loan amount per month. The standard ten-year monthly payment on an unsubsidized Stafford loan is 1.15% of the original loan balance.

However, the regulations also require the full monthly payment to “not be more than is reasonable and affordable based on the borrower’s total financial circumstances.” The determination of what is reasonable and affordable must include consideration of the borrower’s disposable income and necessary expenses such as food, housing, utilities, medical care, dependent care, work-related expenses and other federal student loan repayment obligations.

While collection agencies will initially ask for a full payment on top of the wage garnishment amount, in many cases they may reduce the voluntary payment to the difference between a reasonable and affordable payment and the wage garnishment amount. Providing the collection agency with a copy of a monthly budget of the necessary expenses listed above may help demonstrate whether the additional payment requested by the collection agency is reasonable and affordable.

The monthly payment on $12,000 in unsubsidized Stafford loans under the standard 10-year repayment plan is $138 a month. A $350 wage garnishment amount is 2.5 times this figure, already unreasonably high. At $350 a month and assuming collection charges of 25% deducted from each payment, a $12,000 loan will be paid in full in 4.5 years, less than half the standard 10-year repayment term. It is hard to see how an additional $120 a month could be considered reasonable and affordable on top of this, especially for a borrower with annual income that is less than 250% of the poverty line. Since the payment required for regaining federal student aid eligibility must be voluntary, perhaps the collection agency should consider an extra $1 a month to be voluntary. Or perhaps the collection agency should reduce the monthly wage garnishment amount by $120 so that the current monthly payment can be considered as satisfying the full and voluntary requirement.

If the collection agency is unwilling to work with you on determining a reasonable and affordable payment, you should seek help from a legal aid attorney. Otherwise you’ll be forced to either find an extra $120 a month for six months in your budget or wait about 5 years to go back to college.

Ask Kantro is written by Mark Kantrowitz, an expert on paying for college and publisher of FinAid.org and FastWeb.com, the leading free web sites for information about student financial aid, student loans and scholarships. Write to Ask Kantro at AskKantro@FastWeb.com.