Will the Dept. of Education garnish paychecks for unpaid student loans?

Yes, they will garnish your paychecks. This is not a new threat and trust me, it isn't a scare tactic. They WILL do it. Happens all the time. Seizing income tax returns is not an acceptable payment plan and even with them doing it, will still result in your/her wages being garnished. My advise is to contact them and set up an acceptable payment plan (and stick to it) so they won't start garnishing. It may be too late (going into default takes YEARS of non-payments) but at least you are attempting. Also be aware that a loan that has gone into default will more than double, triple, or more in what the original loan amount was. Once your wife went into default that gave the lender (and subsequent collection agencies) the right to hike the interest rate and attach all kinds of ridiculously high penalties and fees. It is not uncommon for a relatively small loan of 5,000 to balloon to a debt of 15,000 or more depending on how long she lets it go without paying. Every day you/she doesn't pay on it, the interest is collecting. If your garnishments and income tax return isn't even enough to cover the interest, her balance owed is STILL growing.

Yes, they can garnish your paycheck. They cannot garnish your wife's paycheck (unless you're in a community property state and filed your taxes together). Unless you have a very small loan, $1,000/year from your tax refund is not going to cover the monthly payments, plus the amount that you're in default.

Just to throw this in to the other two, correct, answers. The department of education is not garnishing your paycheck, you do not owe them, they gave you the loan but you took it out from a lender. It is that lender (rather the collections agency representing that lender) that is having the IRS retrieve money for them. Each lender will behave differently, they are after all different businesses, when it comes to collecting money. This is why you are having your paychecks garnished and others are not, they simply have a different lender than you do.