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Default On Student Loans

Jerome Said:

If my husband goes into default on student loans can they take the $ out of my bank?

We Answered:


If your husband defaults on his student loans, the lender will spend at least 270 days trying to cajole him into either honoring his obligation, or negotiating a payment plan. If your husband does not respond to the lenders efforts, they will turn his account over to a collection agency, which will pursue him a lot more diligently, and which will add service fees equivalent to approximately 25% of the balance on his loan.

The collection agency will do their best for a while, contacting your husband by phone and letter (even at work), but eventually, they'll return the file to the lender.

If any of the loans were government backed loans (Stafford, Perkins, PLUS), they will contact the IRS, and instruct the IRS to withhold all of your joint tax refunds and any stimulus checks until the loan has been repaid in full.

The Department of Education can also issue a wage garnishment order, without the necessity of going to court. A wage garnishment order requires your husband's employer to withhold 15% of his disposable income from every paycheck, and mail that to the Department. Disposable income sounds warm and fuzzy, like the "extra money" that you had planned to spend on a boat, or something, but that's not the disposable income the Department of Education has in mind. They'll withhold 15% of everything above and beyond the absolute minimum that your husband would need to purchase the cheapest available food, clothing and shelter. The garnishment will continue until the loans have been repaid in full.

The government will report your husband's defaulted student loan debt to all of the major credit bureaus. A defaulted student loan is one of the worst black marks that you can have on a credit history - not only will he be rejected for credit cards, car loans, and mortgages, but his existing credit cards will seize upon that event to cut his credit limits, and to raise his rates to the maximum allowed by law in your state.

Getting back to the tax returns, for a minute. There is a way for you to make a claim to the IRS ('injured spouse") that will protect your share of the joint return refund, but that's extra paperwork you'll have to file every year. If you don't file it, the IRS normally holds both of you responsible under the legal premise of "joint and several liability".

There's a better way, Ella. If your husband can not afford to repay his student loans, he'll need to face up to them, and approach his lenders, hat in hand. If a borrower goes to the lender and acknowledges his/her debt, expresses a desire to repay, and works with the lender to document his/her inability to maintain the scheduled payments, the lender will negotiate a new repayment plan that the borrower can afford.

If your husband hides from his lender, makes them put the debt out to collection, and forces them to pursue legal action, garnishment and refund seizure, all that gets your husband is a much larger bill, and a much less cooperative lender. Student loans are not dischargeable in bankruptcy, so it's better that your husband stand up to the agreements that he made. If he doesn't, it will be a long time before any other creditor trusts him with a loan.

Oh, by the way - no, they can't take money out of your bank account - or your husband's either. The closest that they could come is to sue your husband, get a debt judgment from a court, place liens on your property, and attach certain of his possessions.

Good luck - I hope that helped you understand the risks a little better.

Dale Said:

What happens when you default on student loans? Do they take away your degree or your college stop verifying?

We Answered:

No, your school degree is not affected...But, who ever you have your student loan with can take several actions, since you signed a promisary note for the loans. THey can garnish your wages to get payments on the loan. Some loans are guaranteed by the gov't, in which case if you default, they will use any tax refunds you would receive and apply that against your loan. Also the default will go on your credit report, the same as if you did not pay a car loan or RE loan.

Terry Said:

How long after you're in default on student loans do they proceed to dip into your tax return?

We Answered:

who knows? i was in default for several years and they never took any money from my refund, well now I've got it cleared up with monthly payments and they said they "released" the default status or whatever but I was like, "really?" but I knew they were just full of it. IDK, maybe I fell through the cracks all those years.

Tina Said:

i am about to start a new job today working in a collection center collecting on default student loans?

We Answered:

Be confident, strong and proffessional.
And rememeber, not to take any abuse personally, it will be difficult at first having to ask people for money, or have to threaten them with court action and stuff, but just keep telling yourself that you are doing your job.
You'll be fine and obviously very capable, as you wouldn't have been given the job in the first place.

Good Luck

Wendy Said:

How long do you have to be default on student loans before.....?

We Answered:

Until you are out of default the government will take your tax refund. You should call the lender (collection agency) to see what it will take to get out of default.

This typically takes 9 consecutive on time payments and the payments will probably be higher than if you had made them all along.

Also, you would not be eligible for any federal student aid until the default is cleared.

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