Federally insured student loans are subject to enhanced debt collection procedures that aren’t available to creditors and debt collectors of private student loans or to any other type of debt. For instance, the federal government can offset tax refunds student loan borrowers might be getting if they’re in default on their student loans. Before the offset can occur the Department of Education must send borrowers a written notice of the intent to take the refund. A borrower can raise defenses to the offset, including that the loan has already been repaid; the borrower is totally and permanently disabled; the borrower is eligible for a closed school discharge; or that the borrower has entered into a repayment plan and payments are being made as required under the plan.If a borrower wants to request that a repayment plan be initiated they must do so within twenty days of receiving the notice of intent to offset the tax refund. A repayment plan will be established by the Department of Education and as long as payments are current under this plan the offset won’t occur. Just making voluntary payments after a default has occurred without a certified repayment plan won’t avoid the tax offset though.
Another debt collection procedure unique to federally insured student loans is the ability of the government to garnish wages even without obtaining a judgment against the borrower. If a federal student loan is in default the Department of Education can initiate a wage garnishment of up to 15% of a borrower’s disposable pay (the amount after taxes and health insurance are deducted). Notice must be sent to a borrower at least thirty days prior to the start of the garnishment to give them a chance to object to the garnishment. Borrowers can dispute the amount of the debt or their default. Borrowers can argue that the wage garnishment is a financial hardship but they can typically only make that argument after the garnishment has been in place for six months. In cases where something extraordinary has occurred like an injury, divorce or serious illness the borrower may be able to show hardship earlier than six months.
Yet another debt collection option unique to federal student loans is the ability of the Department of Education to offset Social Security benefits that exceed $750/month. This does not apply to Supplemental Social Security (SSI) benefits. Social Security recipients can apply for hardship reductions in the amount of Social Security funds to be offset. There is no statute of limitations on federal student loans so these collections can last forever.
Iowa law also allows the suspension or revocation of a professional or vocational license if a borrower defaults on a state guaranteed student loan.
If you’re having student loan collection problems and want to talk about your options please call or fill out our contact form.