Student-loan policy has not stood still. Since payments resumed after the pandemic pause, federal agencies restarted default collections in 2025—and then, in January 2026, the U.S. Department of Education (ED) announced it would delay involuntary collections (including wage garnishment and Treasury offsets) as it works through a broader rulemaking overhaul. For HR and payroll teams, this whiplash can translate into compliance risk, employee anxiety, and messy operations if you’re not prepared to pivot quickly.
This article unpacks what’s changed, clarifies your obligations, and outlines a practical playbook for handling garnishment orders, modernizing benefits, and communicating with clarity—all without selling you anything.
Content
- The policy backdrop (and why it matters at work)
- What the current rules actually require of employers
- The 2026 rulemaking: what to watch
- Benefits strategy: use what the tax code allows—while it lasts
- An employer playbook for 2026
- Risk areas that catch SMBs off guard
- Manager talking points you can adapt
- A short employer checklist
- Looking around the corner
- Frequently Asked Questions
1) The policy backdrop (and why it matters at work)
Two truths can coexist in 2026:
- AWG still exists. Administrative Wage Garnishment (AWG) is a long-standing authority that lets federal agencies instruct employers to withhold up to 15% of a borrower’s disposable pay to recover defaulted federal student loans—without a court order. The rules live in 34 C.F.R. Part 34 and in Department guidance.
- The on/off switch has flipped. In 2025, ED resumed collections (Treasury Offset in May and AWG later that summer). In January 2026, ED said it would delay involuntary collections while it advances a package of changes that includes re-setting loan limits and other structural reforms. Employers should expect this pause to be policy-driven, not permanent.
The immediate workplace implication: you may see fewer new AWG orders for a period, followed by a potential wave once ED flips the switch back on or as borrowers transition under the new rules. Your systems and scripts should be ready for both scenarios.
2) What the current rules actually require of employers
Administrative Wage Garnishment, in plain English
Under 34 C.F.R. Part 34, agencies can issue an AWG notice after providing the borrower with due process (notice and an opportunity to contest). Once your payroll team receives a valid order, you must calculate and withhold the amount—capped at 15% of disposable pay—and remit per the instructions. This federal authority preempts conflicting state rules, though other federal garnishments (child support, tax levies) may have priority that affects the final amount withheld.
ED’s borrower-facing guidance mirrors this: “Your loan holder can order your employer to withhold up to 15% of your disposable pay…without taking you to court.” HR should expect employees to quote this page when they have questions.
Timing and process discipline
Because AWG is administrative (not a court judgment), implementation timelines are tight once a notice arrives. The Bureau of the Fiscal Service AWG calculator is a helpful reference to validate amounts and document calculations pay-period by pay-period—a small step that can prevent expensive rework or penalties.
3) The 2026 rulemaking: what to watch
ED’s “Reimagining and Improving Student Education” proposal moved into formal publication in late January 2026. While details will evolve, highlights that matter to employers include changes to loan limits, plan definitions, and program eligibility (e.g., graduate/professional loan rules and aggregate caps). Even if these sound “higher-ed-centric,” they influence borrower cash flow and thus garnishment risk and benefits uptake over the next 12–24 months. Assign someone on your team (or your benefits broker/TPA) to track these entries and summarize impacts for HRBPs and payroll.
4) Benefits strategy: use what the tax code allows—while it lasts
Two levers let employers support employees with student debt without creating taxable income (or at least, with tax-efficient design):
- Section 127 Educational Assistance Programs (EAPs)
Through December 31, 2025, employers may provide up to $5,250 annually per employee tax-free for certain educational assistance—including student-loan repayment—if delivered under a written Section 127 plan. Unless extended by Congress, this exclusion sunsets after 2025, so 2026 planning should assume the tax-free treatment expires. Verify your plan document, eligibility, and payroll reporting flows now; you can still run a meaningful 2025 program. - SECURE 2.0 “student-loan match” in retirement plans
Starting in plan years beginning 2024, employers may match “qualified student loan payments” (QSLPs) the same way they match elective deferrals in 401(k)/403(b)/governmental 457(b) plans. IRS Notice 2024-63 provides Q&A-style guidance on eligibility, substantiation, timing, and plan-doc changes; confer with your recordkeeper and ERISA counsel to operationalize this cleanly for 2026 open enrollment.
Design tip: If your workforce is heavily early-career or frontline, a modest QSLP match often outperforms lump-sum §127 aid in perceived value, because employees don’t have to choose between retirement and debt.
If you have an AWG order in hand, deadlines matter. A quick conversation with an advisor can prevent mistakes. → Explore Payroll & HRIS
5) An employer playbook for 2026
A. Tighten your garnishment machinery (even during the pause)
- Map the end-to-end flow. Intake, validation, calculation, priority ordering, remittance, and record retention. Use a single SOP per garnishment type and maintain a quick-reference matrix for priority conflicts.
- Instrument the math. Adopt a standard worksheet (or the Fiscal Service calculator) and save it with each pay run for affected employees. This protects you if a borrower contests amounts later.
- Test edge cases. Multiple garnishments, mid-period employment changes, supplemental wages/bonuses, and minimum-earnings protections.
- Protect confidentiality. Limit access to garnishment details to “need-to-know” staff and train managers not to speculate about deductions.
B. Prepare an employee-facing “default & garnishment” explainer
- Anchor it to official ED resources (Default Resolution/“MyEDDebt” and StudentAid.gov articles) so employees aren’t debating HR’s interpretation. Include how to request a hearing or explore rehabilitation/consolidation to resolve default.
- Be explicit about your no-retaliation stance and who at the company sees garnishment information.
C. Make a 2-year benefits plan (2025–2026)
- Through 12/31/2025: If using §127 for loan repayment, re-issue the plan summary and educate managers on how it interacts with tuition assistance. Budget to the dollar limits; avoid ad-hoc exceptions that can become precedent.
- 2026 and beyond: Assume §127 loan-repayment tax-free status expires unless extended. If it lapses, consider shifting generosity to the student-loan 401(k) match (keeps value tax-advantaged for retirement) or to taxable stipends with transparent gross-up.
D. Coordinate legal, payroll, and communications
- Legal/Compliance: Update your garnishment SOP to reflect the January 2026 ED delay, plus a trigger to re-activate immediately when ED restarts collections. Cite the press release in the SOP so auditors see your source.
- Payroll/HRIS: Build garnishment codes that capture type (AWG vs. other), origin (ED vs. private), and priority; this makes multi-order conflicts easier to resolve.
Comms: Send a short all-hands note that (a) acknowledges policy volatility, (b) points to official resources, and (c) explains your company’s role (process orders accurately and confidentially; cannot “turn off” lawful orders).
6) Risk areas that catch SMBs off guard
- Treating all garnishments the same. AWG is different from private-loan garnishments (which usually require a court order) and from child support or tax levies. Your priority logic and caps differ by type; mis-ordering deductions is a common error in small payroll teams.
- Documentation gaps. If you don’t retain the math behind each pay-period deduction, it’s harder to defend the company (or correct quickly) if the borrower wins a hearing or ED issues an adjustment. The Fiscal Service tool and a simple worksheet solve this. drift. §127 requires a written plan; don’t “handshake” loan-repayment perks or route them through expense reimbursement—those approaches can inadvertently create taxable wages or discrimination issues.
Plan-document misalignment. For student-loan 401(k) matching, you’ll need conforming plan language, operational controls for verifying QSLPs, and coordination with your recordkeeper to avoid late deposits or mismatch errors under Notice 2024-63.
7) Manager talking points you can adapt
- “What’s going on?”
The Department of Education is temporarily delaying involuntary collections (like wage garnishment) as it finalizes broader changes to student-loan programs. We still have to process any valid orders we receive, and we’ll do so accurately and confidentially. For help with a loan in default, visit the Debt Resolution site from Federal Student Aid. - “Can the company stop this?”
No. For defaulted federal student loans, the government can direct us to withhold up to 15% of disposable pay without a court order. We must comply with valid notices but will always calculate the correct amount and protect your privacy.
“Are there benefits that can help?”
Through Dec. 31, 2025, the tax code lets employers cover up to $5,250 of student-loan repayment tax-free if it’s part of a written Educational Assistance Program. Employers may also match qualified student-loan payments in retirement plans under SECURE 2.0; ask HR how our plan handles this.
8) A short employer checklist
- Update your garnishment SOP to reflect the Jan. 16, 2026 ED delay and the steps to re-activate quickly.
- Validate payroll configurations for AWG percentage caps and priority ordering; test a mock notice using the Fiscal Service calculator.
- Refresh your §127 plan (if offered) for the 2025 plan year; assume the tax-free loan-repayment benefit sunsets after 12/31/2025 absent new legislation.
- Meet with your recordkeeper to confirm your QSLP matching setup under Notice 2024-63 (eligibility, substantiation, timing).
Publish a one-page employee explainer that links only to StudentAid.gov and Debt Resolution pages for accuracy and trust.
9) Looking around the corner
As ED’s 2026 rulemaking progresses, loan structures and repayment options will likely change again, with downstream effects on employees’ monthly cash flows and on HR case volumes. Treat this period as an opportunity to strengthen your garnishment controls, modernize your benefits mix, and communicate with empathy grounded in official sources. If you do those three things well, you’ll protect your organization—and you’ll help your people navigate a confusing transition with fewer surprises.
Automate garnishments, keep clean audit trails, and get a named payroll specialist who actually picks up the phone.
Frequently Asked Questions
What is administrative wage garnishment (AWG) for student loans?
AWG is when the federal government directs an employer to withhold a portion of an employee’s disposable pay for defaulted federal student loans. Employers must comply, calculate correctly, and remit on time. The cap is generally up to 15% of disposable earnings.
Which orders take priority over student loan garnishments?
Child support and federal tax levies typically take priority. Always confirm priority rules when multiple orders exist.
How do I calculate the withholding amount correctly?
Apply the order’s instructions, cap the deduction at 15% of disposable pay, and ensure protected minimum earnings. Automate the math in payroll and document your steps.
What should HR/payroll do first when an AWG arrives?
Verify the order, log it in HRIS (Student Loan AWG type), confirm effective dates, apply priority rules, calculate the amount, set up remittance, and store documents for audit.
Can an employee stop a student loan garnishment?
Employers cannot stop a valid AWG. Employees may explore consolidation or rehabilitation to exit default and should consult official federal resources or their servicer.
What happens if we calculate or prioritize incorrectly?
You may face penalties or re-processing. Use automation plus a review checklist. Maintain clear logs of calculations and remittances.
When should I route to HR Advisory instead of Payroll?
If the situation is urgent or high-risk (e.g., an active dispute, termination, or complex complaint alongside the garnishment), route to HR Advisory first. For standard AWG setup and processing, start with Payroll/HRIS.
If you need help with workforce management, please contact PeopleWorX at 240-699-0060 | 1-888-929-2729 or email us at HR@peopleworx.io
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