What Happens If You Default on Your Student Loans
Know what to expect if you fall behind on student loan payments.
The government has powerful tools to use against borrowers who don't make student loan payments. Here's what you can expect if you are in default on a student loan.
Tax Refund Offsets
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.
You can challenge a tax refund offset. To learn more about acceptable reasons to challenge offsets and how to do so, see the National Consumer Law Center's Student Loan Borrower Assistance website at www.studentloanborrowerassistance.org.
Your Paycheck Garnished
The government can take ("garnish") a limited portion of the wages of a student loan debtor who is in default. It can take up to 15% of your disposable income. However, it cannot take more than the equivalent of 30 times the current federal minimum wage.
As with the tax refund offset, you can object to a wage garnishment. To learn more about the reasons for objection and how to object, see the National Consumer Law Center's Student Loan Borrower Assistance website at www.studentloanborrowerassistance.org.
Another way to avoid wage garnishment is to contact the holder of your loan and negotiate a repayment schedule. For more information, see Nolo's article on Student Loan Repayment Options.
Your Federal Benefits Taken
The government can take some federal benefit payments (including Social Security retirement benefits and Social Security disability benefits, but not Supplemental Security Income) as reimbursement for student loans.
The government cannot take any amount that would leave you with benefits less than $9,000 per year or $750 per month. And, it cannot take more than 15% of your total benefit.
For example, if Doug receives monthly federal benefits in the amount of $900, the government may take either $150 (the amount of Doug's $900 benefit that is over $750) or $135 (15% of Doug's total benefit of $900), whichever is less. So, in this case, the government can take only $135 each month.
You Get Sued
The government and private lenders can sue you to collect defaulted student loans. Unlike other debts, there is no time limit on suing to collect student loans you can be sued indefinitely.
For information on various defenses to student loan collection lawsuits, see the Student Loan Borrower Assistance website at www.studentloanborrowerassistance.org.
Where to Get Help
If you need help with a defaulted student loan, contact the Department of Education's Ombudsman at 877-557-2575 or visit its website at www.fsahelp.ed.gov. 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.
More Information
For a comprehensive guide to dealing with financial difficulties, read Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and Margaret Reiter (Nolo).