An inheritance can't be garnished for federal student loans or private student loans. But if you are sued for student loan debt and a court enters judgment against you, your student loans could, depending on your state's laws, levy (take) the inheritance out of your bank account. This type of debt collection rarely happens.
In my experience, if you have massive student loan debt, you and the loved one leaving you money can rest easy in knowing your inheritance is safe.
If student loans can't garnish my inheritance, what can they garnish?
Federal student loans can garnish your:
The federal government cannot garnish your IRA, pension, disability benefits, retirement accounts, 401k, etc.
From now through December 31, 2020, the federal government, in response to the Coronavirus/COVID-19 pandemic, has suspended collections of defaulted student loans owned by the Department of Education. So if you've been holding off on filing your tax return to stop the IRS from offsetting your refund, you may be able to safely file your return. I say may, because before you file, call 800-621-3115 to make sure your loans are owned by the Department of Education.
Private student loans can garnish your bank account and wages and place a lien on your real estate, but only if they sue you and get a judgment. (Again, their ability to do those things depends on your state's laws.)
Typically, private student loans don't sue you right after you have a late payment or default. I mostly see them sue student loan borrowers when the statute of limitations is close to running out.
Click here to learn Can Student Loans Put a Line on Your House?
When can you be garnished for student loans
You can be garnished for federal student loans only after you default. You default after you miss 9 consecutive student loan payments (270 days).
Once you default, your loans will typically be sent to the US Department of Education's Default Resolution Group. From there, the DRG will send your loans to a private debt collection agency to handle your loans until you get out of default. The debt collection agency will send the wage garnishment order to your job.
Your loans aren't sold to the collection agency. They're simply sent there for collections.
You can be garnished for private student loans after you default and you're sued for student loans and a court enters judgment against you.
You usually default on a private student loan after you miss one monthly payment. Sometimes, your private loan servicer will say you're late or delinquent. But often, according to your promissory note, you're likely in default.
No matter whether they say you're in default or delinquent or simply late, you likely won't have to worry about a lawsuit until a year or two from the last time you made a monthly payment.
How to get out of student loans out of default
You have 3 options to get out of default on your federal student loans:
- Negotiate a lump sum settlement
- Apply for a loan consolidation and agree to an repayment plan based on your adjusted gross income or
- Enter into the loan rehabilitation program.
With private student loans, the only way to get out of default is if your loans are still with the loan servicer. If they are, you may be able to get out of default by requesting a deferment/forbearance, paying the student loan payments you missed, or setting up a new payment plan.
In case you're wondering, you likely won't be able to refinance your private student loans for a lower interest rate, better payment plan, etc. The damage done to your credit report by the late payments likely wrecked your credit score.