If you default on a federal student loan, the Department of Education has the power to garnish your wages and use your tax refund as an offset. These extremely unpleasant things all happen outside the court process and there is no statute of limitations. In fact, these collection powers are so powerful, that the Department rarely brings collection lawsuits against borrowers anymore. If you are dealing with student loan garnishment or offset, here’s what you need to know.

Wage Garnishment

The majority of federal student loan garnishments are done by the Department of Education itself. Under federal law, the Department may seize up to 15% of your disposable pay from each paycheck. This is typically the amount of your wages remaining after deducting taxes and health insurance.

The wage garnishment process happens administratively—they don’t have to sue you first and there is no court oversight of the process. They do, however, have to notify you in writing of their intent to garnish. This letter must list the nature and amount of the debt and give you a summary of your rights.

Borrowers have 15 days from the date that the intent to garnish notice was mailed to request a hearing. Borrowers can request a hearing after that date, but the garnishment will proceed while the hearing is still pending. Although borrowers have a right to an oral hearing, most hearings are conducted merely through the submission of the relevant paperwork. A decision must be issued within 60 days.

During the hearing, borrowers may object to the garnishment for a couple of reasons, including: (1) disputing the existence of the debt; (2) challenging the enforceability of the debt because it was based on forgery, or was discharged in bankruptcy or on statutory grounds; and (3) seeking to reduce the amount of the garnishment based on financial hardship. The borrower may also raise their eligibility for non-bankruptcy discharges, such as total and permanent disability or school closing during this process. There is a strict process to follow and forms that must be used to raise these issues and request a hearing.

Borrowers may also stop a garnishment by exercise their rights to rehabilitate or consolidate their defaulted loans. If all else fails, filing bankruptcy to stop the garnishment is an option.

Tax refund offset

The Department may also seize your tax refunds to offset the amount you owe on a defaulted federal student loan. They have to notify you in writing of their intent to seize your tax refund and provide you with a summary of your rights.

The defenses to a tax refund offset include: (1) disputing the existence of the debt; (2) challenging the enforceability of the debt because it was based on forgery, or was discharged in bankruptcy or on statutory grounds; and (3) the borrower is current on a repayment plan for the loan. In general, hardship is not a defense to a tax refund offset.

Borrowers may also prevent a tax refund offset by entering into an agreeable repayment arrangement or by exercising their rights to rehabilitate or consolidate their defaulted loans, though there are strict timelines that must be followed to prevent the tax refund seizure. As a practical matter, it is nearly impossible to get a tax refund back after it’s been seized.

Finally, filing bankruptcy will stop the tax refund offset.