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Student Loan Collections

What Might Happen If You Fall Behind On Your Student Loan Payments

The Department of Education has powerful tools to use against students who don't make their payments. Here's what you can expect if you are in default on a student loan.

Assessing Collection Fees

Defaulting on federal student loans can cost you a bundle — far in excess of the amount you borrowed originally. Loan guarantee agencies can charge you collection fees that may be quite high. In addition, collection agencies charge the Department of Education a commission, which is passed on to you. You end up having to pay the money you owe on the loan, the collection fee and the commission.

Intercepting Your Income Tax Refund

The IRS can intercept any income tax refund you may be entitled to until your student loans are paid in full. This is one of the most popular methods of collecting on defaulted loans, and the Department of Education annually collects hundreds of millions of dollars this way.

Each tax year, the guarantee agency holding your loans must review your account to verify that you haven't made any loan payments within the previous 90 days. If you have made no payments, the agency notifies the IRS that your loans are in default. If you are entitled to a tax refund, the agency will notify you that the IRS proposes to keep all or some of your tax refund.

To object, you must present written evidence to the agency, within 65 days of the date on the notice, of any of the following:

  • You have repaid the loan.
  • You are making payments under a negotiated repayment agreement, or you have been granted a cancellation, deferment or forbearance.
  • You have filed for bankruptcy and your case is still open, or your loans were discharged in bankruptcy.
  • You are totally and permanently disabled.
  • It is not your loan.
  • You dropped out, and the school owes you a refund.
  • You borrowed the money to attend a trade school, and you were either unable to complete your education because the school closed, or you were falsely certified by the school as eligible for the loan.
  • The loan is not legally enforceable for any other reason (for example, your signature on the loan papers was forged).

Taking Part Of Your Paycheck

The Department of Education and student loan guarantee agencies are authorized to take ("garnish") a limited portion of the wages of a student loan debtor who is in default. Due to recent changes in the law, the department may garnish up to 15% of your wages (but guarantee agencies are limited to collecting 10% of your wages). But even the Department can't take as much as 15% if it means that your weekly income would be less than 30 times the federal minimum wage. Based on the current minimum wage of $5.15, this means that a minimum of $154.40 (30 x $5.15) of your weekly wages are protected from garnishment.

You can object to a wage garnishment if you have returned to work within the past 12 months after being fired or laid off — call or write to the department or guarantee agency. If you have been continuously employed for the previous 12 months, you can raise one of the objections listed above in the section on intercepting your tax refund. You can also object to the garnishment if it would result in an extreme financial hardship for you.

Another way to avoid wage garnishment is to contact the holder of your loan and negotiate a repayment schedule.

Taking Your Federal Benefits

Under the Debt Collection Improvement Act, the government can take some federal benefit payments (including Social Security retirement and Social Security Disability, but not Supplemental Security Income) to pay back certain federal debts, including student loans.

The amount that can be taken is limited. Only the first $9,000, or $750 per month, can be seized. In addition, the total amount taken can never be more than 15% of your income, and if your Social Security benefits or other qualifying federal benefits are $750 or less, the government cannot take any of your money.

Suing You

The Department of Education can sue you for defaulting on your student loans. Unlike other debts, there is no time limit on suing to collect student loans — you can be sued indefinitely.

Still, there is a good chance you won't be sued if your loan agency determines that:

  • the cost of suing would exceed any amount it could get from you, or
  • you have no assets that could be taken to satisfy all or a substantial portion of the debt.

What property the Department of Education can take from you depends on where you live. In most states, the department can go after your bank and other deposit accounts, and valuable personal property such as cars and antiques. The department can also file the judgment with the county records office to create a property lien — a notice to the world that you owe money. In most states, a judgment entered against you creates a lien on any real estate you own. If you want to sell or refinance your property, you must remove all liens — usually by paying the lien holder — before the deal can close.

Where To Get Help

If you need help with a defaulted student loan, contact the Department of Education's ombudsman at 888-843-5787 or visit its website at But first you must take steps to resolve your loan problem on your own (there is a checklist of required steps on the website), or the ombudsman will not assist you.

Checklist: Managing Your Student Debt Load

To read and printout a copy of the Form, please click the link given below.

Managing Your Student Debt Load

You can download a free copy of Adobe Acrobat Reader at

Copyright © 2005 Nolo


This publication and the information included in it are not intended to serve as a substitute for consultation with an attorney. Specific legal issues, concerns and conditions always require the advice of appropriate legal professionals.

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