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The Price of an Education: When Employers Can Be Held Liable for their Employees’ Student Loans

Winter 2005Cole Schotz DocketAttorney: Christopher P. Massaro

Many employers are often willing to help their employees pay for an education.  However, an unwary employer could actually be forced to make that financial contribution under the current versions of the Higher Education Act of 1965 and Debt Collection Improvement Act of 1996.

Events begin when an employee defaults on a student loan that is guaranteed by the U.S. Department of Education (“DOE”) or another government-authorized guaranty agency.  After receiving notice of the default, the DOE or guaranty agency will then arrange for the payment of the outstanding balance of the loan to the lender.  This guaranty arrangement encourages lenders to make student loans by giving them extra assurance that the loans will be repaid.

Once the loan is satisfied, the DOE or guaranty agency will pursue reimbursement from the employee.  To assist with those collection efforts, federal law empowers them to issue orders requiring employers to garnish the wages of employees who refuse to pay their student loans.  The DOE and guaranty agencies can issue these orders on their own authority and without the approval of any court.

The consequences are severe for employers who disregard these orders.  The DOE and guaranty agencies are permitted to sue employers who fail to comply with wage garnishment orders in state or federal court.  An employer will be held liable for the wages it should have withheld from the employee, and will have to pay the attorneys’ fees incurred by the DOE or guaranty agency in prosecuting the action.  A court also has the discretion to award punitive damages for an employer’s noncompliance.

Additionally, employers cannot terminate employees simply because they dislike the fact that a wage garnishment order was served upon them.  Employees terminated on this basis can sue their employers for damages—including punitive damages and attorneys’ fees.

The message is clear.  An employer who receives a wage garnishment order must take prompt and appropriate action to avoid liability.  The employer should seek the advice of an attorney who can confirm the validity of the order and explain the employer’s rights and obligations in detail.

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