Individuals defaulting on college loans aren’t the only ones at risk of having wages garnished. Parents or other co-signers often don’t realize they’re just as vulnerable. Small business owners also need to get on board with the ever-changing rules.
According to a report from ADP, student loans/consumer debt ranks among the top three reasons for wage garnishment, along with child support and tax liens. Approximately $1 billion in government-backed student loan debt has been garnished each year over the past several years, a 40 percent rise from 2006, according to the U.S. Department of Education.
“I’m not surprised by the uptick,” says Gail Gottehrer, a litigator in the New York City office of Axinn, Veltrop & Harkrider LLP, whose practice includes employment law. It’s gotten harder for young people to land and keep jobs, and there’s been a workforce shift to more part-time and seasonable work. The cost of rent, food and other necessities is also a key determinant of student loan default rates, she says.
Amended laws in Michigan, California and Georgia are expected to help ease the burden of wage garnishment on employees and employers. Until last September, employers in Michigan who made a minor mistake or missed a deadline for a garnishment order could be liable for the full amount of an employee’s debt. The state’s amendment “has really taken away that kind of gotcha,” says Gottehrer.
Still, “the risk of getting it wrong can be very expensive,” she says, referring to wage garnishment in general. Employers must understand the laws in every state where they do business and be careful not to discriminate against employees facing garnishments. “Keep this to a minimum number of people who need to know,” she says, “and don’t let it become common knowledge or office gossip.”
Meanwhile, financial advisors should inform their clients before they amass student loan debt about the long-lasting consequences of failing to pay it off, she says.
According to the Federal Reserve Bank of New York, only 63 percent of student loan borrowers appear to have avoided delinquency and default, notes Jason Erb, director of Strategic Alliances for Small Business at New York City-based Wolters Kluwer’s CT Corp., a leader in registered agent, incorporation and corporate business compliance services.
“The wage garnishment issue is growing exponentially,” says Erb. Small businesses are being served more with garnishment papers, he says, and Wolters Kluwer’s CT Corp. is getting increasingly involved in student loan garnishments.
What’s tricky, says Erb, is every state agency has its own rules and timeframe for responding to garnishments. Eventually, “we think this will be regulated in a more uniform way,” he says, “but it’s still in its infancy now.”
Erb encourages small businesses to hire registered agents who can help them comply. Those with employees should consider incorporating, he says, to help remove some liability that can fall back on them from garnishments and other issues. “As a small business owner, it’s the last thing you think about,” he says, “but it can get you in hot water quickly.”