The Department of Education offers eligible students various programs to help pay for their educational endeavors. This assistance can be loans, grants or a combination of the two, depending on your income and the cost of qualified expenses, such as tuition and fees. Though grants do not have to be repaid, loans do. Failure to repay a student loan puts you in default with the Department of Education and collection action can be taken.
If you default on student loans, action can be taken by the entity to which you owe the debt - the bank, the Department of Education, your school or your loan guarantor. These actions can include reporting your debt to credit bureaus, which affects your credit rating; removing your eligibility for future student loans or grants; assessing late fees, collection costs and interest; filing lawsuits that can result in wage garnishment; and applying your federal tax refund checks to your loan balance.
Treasury Offset Program
The Treasury Offset Program was instituted by the Treasury Department, with congressional authorization, to assist federal agencies to whom debts are owed. The agencies involved in the program include the Department of Education. Under the TOP, agencies to whom a debt is owed notify the Treasury Department of the debt and the debtor and request inclusion in the collection program. Under this program, your federal income tax refund can be garnished, as well as Social Security payments and refundable tax credits. You will receive a notice that the garnishment is imminent and procedures for disputing the debt, but the garnishment will take place while your dispute is being resolved. If you prevail, your money will be refunded to you.
Administrative Wage Garnishment
If you default on your student loan, you may also be subject to an administrative wage garnishment, which means that a court order is not required. Prior to the garnishment, you will receive a notice of intent. At that point you can dispute the debt or enter into a voluntary repayment arrangement that will stop the garnishment. The Department of Education can have your employer withhold 15 percent of your disposable pay to satisfy the debt. Disposable pay is income that is not used to pay income taxes, Federal Insurance Contributions Act taxes, other court-ordered garnishments and any withholding that is statutorily required, such as some pension contributions. Voluntary garnishments or contributions are not included in the exclusion calculations.
The Treasury Department also works with collection agencies to whom the department pays a commission. If you are subject to collection by an agency, you must pay the commission as well as the principle and interest on the loan. The commission is satisfied first, which will increase the amount owed on your debt by 25 percent. In addition, your debt will increase due to the interest that is charged until the debt is repaid.