Resolving Federal Loan Default
Federal law defines default as 270 days past due. Defaulted loans are not eligible for deferments, lower payment options or other benefits. Defaulted loans are also eligible for wage and tax refund garnishment, significant collection costs, and have significant implications to the borrower’s credit report. While the first set of rules take effect as soon as the loan becomes 270 days past due, the rest don’t come into effect until the loan transfers to a guaranty agency (for FFEL loans) or a collections agency (for Direct Loans). Once this happens, there are only three ways to get out of default:
- Pay the loan in full
- Loan rehabilitation
Consequences of Loan Default and When They Happen
It’s important to understand the consequences of federal student loan default and when to expect these consequences to occur.
Within 30 days of the loan transferring to a collection or guaranty agency, you will be sent a letter notifying you of this transfer and who to contact to resolve the default. From there you will have 60 days to either pay the loan in full, or start on a repayment or loan rehabilitation program or consolidate the loan out of default. Remember, as the loan is in default, you are no longer eligible for income driven or other repayment plans, deferments or other options, but will instead have to work with the current loan holder to determine a payment that is acceptable.
If you do not start one of these programs within that 60 days, or start and don’t complete them down the line, collection costs will be added to your loan. These costs, per federal law, can be as high as 24% of your loan balance as of the date the costs are assessed.
Federal Payment Garnishment (including Tax Refunds)
If you take no action to resolve your default within that 60 day period, the current loan holder will very likely begin the tax refund garnishment process. Once you are certified for federal payment garnishment, you will generally continue to be garnished until the loan is either paid in full or out of default through rehabilitation or consolidation. Federal payments that can be garnished under this process include:
- Federal and state tax refunds
- Social security (up to 15% but they can’t leave you with less than $750 per month)
- Benefits under Part B of Black Lung Act
- Railroad retirement benefits
- Other federal payments except those listed here
- SSI CANNOT be garnished
You will be sent a letter about two months before the offset is due to begin and you can request a review of your account at that time. If you are requesting the garnishment not take place for financial hardship reasons, you will need to submit proof of income and fill out a hardship form you can obtain from the loan holder. If you do not return these forms within the required timeframe, generally ten days after you request the review, the offset will continue to be processed, but can be ceased at a later time if your review proves successful.
If your loans are under federal payment offset, you can also request a return of some or all of those funds for financial hardship reasons. These are approved on a case by case basis and significant hardship must be proven. Examples of reasons that such funds can be returned often include threat of eviction or foreclosure.
If you default on your federal student loan, and do not make arrangements to pay, the loan holder will attempt to garnish your wages. Federal student loans can do this without obtaining a judgment in court so the process can happen fairly quickly.
Wage Garnishment Process
The loan holder will first send you a notice notifying you of the pending wage garnishment. Remember, it is your responsibility to ensure they have a current address for you, so if they do not, and you don’t receive the notice, or if you don’t open the notice, they may still proceed with the garnishment.
Once the notice is sent, you will have 30 days to request an appeal of the garnishment. Reasons for appeal include:
- Financial hardship
- Loan is not valid
- You have filed for bankruptcy
- The borrower is deceased or disabled
- You were fired or laid off from your last job and have been working at your current job less than 12 months
- •You are eligible for student loan discharge or forgiveness
- You have started a repayment plan and are making payments
Note that in most cases, the burden of proof is on the borrower to show these exceptions exist. For financial hardship appeals, the loan holder will have a form you are required to fill out that shows your full financial situation. The garnishment hearing administrator will review your expenses to determine if they are reasonable compared to current IRS guidelines. If you are approved for a financial hardship appeal, the loan holder may request a resubmission of your financial information as often as every six months. Failure to respond or meet the criteria could result in a resumption of the process.
The appeal can be either in writing, in person or by phone. If you request an in person appeal, the administrator of the wage garnishment hearing will determine the location, and all travel expenses must be paid by the borrower. There is usually little value in attending an in person hearing versus one administered by phone. If you request an in person or by phone hearing, and do not show up, the hearing may continue without you.
You can submit additional evidence or objections during the appeal process, until the case is considered closed by the administrator. Hearings are generally concluded within 60 days of the loan holder receiving your request for one. You can request an extension during that period.
You can file an appeal after the 30 day window discussed previously, but this will not stop the garnishment process. If you are successful in your appeal, future garnishment orders will be adjusted or cease.