Student Loan Collections

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Student Loan Collections
What might happen if you fall behind on your payments.

After lots of publicity about deadbeat college grads who didn't pay back their loans -- and cost the taxpayers almost as much as a few toilet seats on Navy fighters -- Congress decided to crack down.

The Department of Education was given powerful tools to use against former students who don't make their payments.

Assessing Collection Fees

Defaulting on federal student loans can cost you a bundle -- far in excess of the amount you borrowed originally. Guarantee agencies typically add a collection fee of 25% to the principal, interest, penalties and other collection fees you already owe. (If you try to negotiate a payment plan to get yourself out of default, the guarantee agency will cut the fee to 18.5%.) In addition collection agencies charge the Department of Education a commission of about 28%. That commission is passed on to you, meaning you have to pay the money you owe on the loan, the collection fee and the commission.

Grabbing Your Income Tax Refund

The IRS can intercept your income tax refund until your defaulted student loans are paid in full. It is one of the most popular methods of collecting defaulted student loans. Annually, the Department of Education collects hundreds of millions of dollars this way.

The IRS can intercept a refund only if the loan is held by a guarantee agency, the Department of Education or a collection agency working for one of those two. If your school, the lender, a loan servicer or a company on the secondary market has your loan -- even if you are behind on your payments -- your tax refund is protected from the clutches of the IRS.

Each tax year, the agency holding your loans must review your account to verify that you haven't made payments on your loans within the previous 90 days. Once it verifies this information, 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 it. To object, you must present written evidence, within 65 days of the date on the notice, of any of the following:

You've repaid the loan.

You are making payments under a negotiated repayment agreement, or you've 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 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).

Paring Your Paycheck

The Department of Education and guarantee agencies are authorized to take ("garnish") 10% of the wages of a student loan debtor who is in default. Unlike virtually all other creditors, the holder of your student loans does not have to sue you first.

You can object to the garnishment if you've returned to work within the past 12 months after being fired or laid off. Call or write to the agency. If you have been continuously employed for the previous 12 months, you can raise one of the objections permitted when the IRS seeks to intercept your tax refund. (See above.)

You can also object to the garnishment if it would leave you with a weekly take-home pay of less than 30 times the federal minimum wage ($5.15), or $154.50, or if garnishment would otherwise result in an extreme financial hardship for you.

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

Losing Your Federal Benefits

Under the Debt Collection Improvements 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. And the total amount taken can never be more than 15% of your income. If your Social Security benefits or other qualifying federal benefits are $750 or less, the government cannot take any of your money.

Getting Sued

You can be sued forever on your defaulted student loans. And the Department of Education is suing former students more and more frequently. Student loan collection lawsuits filed by the Department increased by 55% between 1997 and 1998.

You aren't likely to be sued, however, if the agency holding your loans determines that:
the cost 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 could 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 some states, a judgment entered against you automatically creates a lien on any real estate you own in the county where you lost the lawsuit. In other states, the creditor must record the judgment with the county. When you sell or refinance your property, all liens must be removed, usually by paying the lienholder -- before the deal can close.

Getting 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 http://www.sfahelp.ed.gov. The Ombudsman will only assist you if you have first tried to work out the problem on your own.

Copyright 2002 Nolo, Inc.

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Applying for a Cancellation

To cancel a student loan, or to determine if you qualify for cancellation, call your loan holder or the Department of Education's Debt Collection Services Office at 800-621-3115. A customer service representative will send you a cancellation application, which you will have to complete and return with any necessary documentation, such as a statement from a physician describing your disability.

Applying for a Deferment

Deferments are never automatic. You must apply for them. You can defer repayment of a student loan if you meet one of the conditions described above and you are not in default -- that is, you have made your payments on time, are in the grace period after graduation or have been granted other deferments or forbearances. Occasionally, you may qualify for retroactive deferment -- a deferment that will cover past due payments short of default.

To obtain a deferment, you must obtain the appropriate paperwork from the holder of your loan, complete it carefully and follow up to make sure your request is processed correctly. This may sound like a lot of work, but if you're having trouble making your loan payments, it's worth the effort. A deferment can buy you some time when you need it most.

Start by contacting the holder of your loan. Tell your loan holder which deferment you think you qualify for and ask for the proper form. The holder's representative will generate the form, including your name, address and account information and should note in your file that you've requested the form. This may help you keep the loan holder off your back if your payments are past due.

Applying for Forbearance

Contact the holder of your loan and explain your situation. You may be sent some forms to complete, requesting information on your income and expenses.


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