Department of Education Debt Collection
The U.S. Department of Education has a number of mechanisms at their disposal to collect default student loans. The two primary tools at their disposal are to “claw back” money from tax refunds and Social Security payments, and to require employers to withhold wages from those whose student loans have defaulted. They also send defaulting student loans to outside collection agencies, and charge the consumer the associated collection costs. If someone with student loan debt is taken to court, the person is responsible for paying court costs.
Treasury Offset Program
The Department of Education uses what’s called the “Treasury Offset Program,” whereby the Department of Education sends defaulted loans to the Department of the Treasury. The Treasury Department can seize your federal or state income tax refunds to help pay off the loan. Similarly, many student loans are administered by a state guaranty agency, and the state guaranty agency can also seize state income tax refunds.
If you have a student loan that’s in default and you haven’t worked out a repayment plan or don’t make your payments on time, the U.S. Department of Education can require that your employer garnish your wages. According to the Higher Education Act and the Debt Collection Improvement Act of 1996, up to 15 percent of your disposable wages can be garnished.
If you’re going to be subject to wage garnishment, you have a number of rights:
- The Department of Education must notify you 30 days in advance that it intends to garnish your wages. It must also notify you of the amount and nature of the debt, and provide you with the opportunity to look at debt-related records and dispute the garnishment.
- You can avoid garnishment by agreeing, in writing, to a repayment plans.
- You have the right to a hearing, during which time you can object to the validity of the debt, the amount of the debt, or the Department of Education’s attempt to enforce the debt.
- You can argue during a hearing that a 15 percent garnishment would constitute extreme financial hardship.
- If you’ve been laid off for 12 months and have just recently gotten a new job, you can argue at a hearing that the garnishment should be withheld.
- You can postpone the garnishment until the hearing process is completed and a decision has been rendered.
- If your wages are garnished and you are fired, refused employment, or face a disciplinary action by your employer, you have the right to sue your employer.
It should be noted that requested a hearing isn’t as straightforward as it sounds. All in-person hearings are held in Atlanta, Chicago, or San Francisco, and the costs associated with attending the hearing fall upon you.
If you are a federal employee, your rights are similar to those stated above. You can contact the Federal Salary Offset Unit in order to agree to a 15 percent garnishment, enter into a repayment agreement and send the first payment within 65 days of receiving the garnishment notice, or provide documentation proving that a 15 percent garnishment of disposable pay will constitute an extreme financial hardship. You can also dispute the debt or request a hearing.
Paying Collection Costs
Another way that student loans differ from other types of consumer debt is that, if your student loan is in default, you’re responsible for paying costs associated with collecting the debt. Typically, a debt collection agency gets a 25 percent contingency fee for collecting a student loan debt. In other words, you have to pay the debt collector’s commission. Moreover, any payment you make first goes to paying the debt collector’s commission fee; anything leftover goes to the student loan’s interest and principal.
Paying Court Costs
If you have a defaulted student loan, the Department of Education or the state guaranty agency may take you to court. If you’re sued, you may be forced to pay not only the balance of your loan, but attorney’s fees and court costs as well. Typically, the Department of Education resorts to suing a consumer only if he or she refuses to repay the student loan.
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