What Happens If You Default on Your Federal Student Loans

Know what to expect if you fall behind on student loan payments.

Defaulting on your federal student loans has serious consequences. The government has powerful tools to use against borrowers who don't make student loan payments. Here's what you can expect if you're in default on a federal student loan.

Tax Refund Offsets and Federal Benefits Intercepts

The U.S. Department of Education can ask the IRS to intercept (take) your tax refund and apply the money to your debt. (This process is sometimes called a student loan tax refund offset.) The government can also take federal benefits that are usually exempt from collection, like Social Security, to repay a defaulted federal 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. In some cases, you can challenge a tax refund offset though you might need the assistance of an attorney. (You can find a legal expert near you on Nolo's Lawyer Directory.)

Social Security intercepts. 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. (Learn more in Defaulting on Your Student Loans: Tax Refund and Social Security Intercepts.)

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

Loans Placed With a Collection Agency

After you default, your loans will likely be placed with a private collection agency. These agencies get a commission for any payments you make on loans that they're trying to collect. So, after you make a payment, the payment goes first towards paying the amount of the commission for the private collection agency and the rest goes towards paying interest and principal on your loan. This can significantly increase the total cost of your loans.

You Get Sued

The government can sue you to collect defaulted student loans. Unlike other debts, there is no time limit on suing to collect federal 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. To get legal representation, look for an attorney on Nolo's Lawyer Directory.

Where to Get Help

To get help with your defaulted loan, contact the servicer or holder of your defaulted loan. Learn who services or holds your loan by logging in to My Federal Student Aid website or check the National Student Loan Data System (NSLDS).

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