The Department of Education and private lenders can take money from your bank account to recover student loan debt that’s in default. But they cannot garnish your accounts automatically. They have to sue you and get a court judgment against you before starting the garnishment using a bank levy.
If you’re experiencing financial hardship and are delinquent or in default on your student loans, here’s what you should know about when student loans can garnish your bank account.
Disclaimer: Although I am a student loan lawyer, this article contains general information and should not be taken as legal advice. If you want legal advice that pertains to your specific situation, you should schedule a free 10-minute consultation with me.
When can student loans garnish your bank account?
Student loans can garnish your bank account only after you’ve been sued to recover defaulted student loan debt. Neither the Department of Education nor private lenders wait a set time before they decide to sue borrowers. Instead, they both typically exhaust other collection efforts first, and, in the case of private student loans, the statute of limitations is close to running out.
Once the lender moves forward with the lawsuit, they have to follow specific steps before getting a court order that allows them to take money from your savings or checking account. Those steps typically include:
- serving you with a copy of the lawsuit paperwork
- proving you borrowed the money
- showing you breached the contract by missing student loan payments
- detailing the current loan balance, including collection fees
If you’re sued for student loan debt, it’s vital that you take steps to protect yourself. Ignoring the lawsuit won’t make it go away. It will only make the problem worse.
Can student loans take your retirement? Your retirement and pension are safe from your student loans unless you default. If that happens, the lender may sue you and get a judgment that allows it to take money from your bank account, including your monthly retirement benefits. However, certain federal benefits like Veterans Benefits and Supplemental Security Income (SSI) are protected from garnishment.
Can student loans garnish your savings account? Student loans can garnish your savings account only after a court order is entered against you. Once that happens, the debt collector can notify your bank to send them the nonexempt money in your account to repay your debt.
How to stop a bank account garnishment for a student loan judgment
Once a judgment for student loan debt has been entered against you, there are two ways to protect your bank account (and your home) from garnishment:
- Negotiate a payoff with the judgment creditor. In my experience as a student loan lawyer, I’ve been able to negotiate debt settlements in these situations. However, the debt collector typically demands a lump-sum payment of at least 50% of the current balance within 30 days. Few people have that type of money lying around. And even fewer have a good enough credit score to get a personal loan to try and borrow it.
- File bankruptcy. Filing a Chapter 7 or Chapter 13 bankruptcy case protects your paycheck and bank accounts from garnishment. It also eliminates your debt from credit cards, medical services, and other consumer debt. However, it won’t erase your student loan debt. To do that, you’ll need to file an adversary proceeding and argue repayment of your student loans will cause you undue hardship.
What money in your bank account is safe from student loan garnishment?
Not all the money in your bank account can be taken to repay student loan debt. Federal law provides exemptions that protect different types of income from garnishment and bank levy. Before a bank sends money to a collection agency, it must review the savings or checking account to see whether any money is “off-limits” due to exemptions.
Federal benefits with exemptions from garnishment:
- SSI Benefits
- Veterans’ Benefits
- Civil Service and Federal Retirement and Disability Benefits
- Military Annuities and Survivors’ Benefits
- Railroad Retirement Benefits
- Merchant Seamen Wages
- Longshoremen’s and Harbor Workers’ Death and Disability Benefits
- Foreign Service Retirement and Disability Benefits
- Compensation for Injury, Death, or Detention of Employees of U.S. Contractors Outside the U.S.
- Federal Emergency Management Agency (FEMA) Federal Disaster Assistance
In addition, child support, alimony, and income from pensions, 401(k)s, and other Employee Retirement Income Security Act (ERISA) qualified retirement plans can’t be garnished. But Social Security Disability Insurance can be garnished to repay, among other things, delinquent IRS and student loan debt.
What type of bank accounts cannot be garnished for student loans? Any savings or checking account or other financial accounts can be garnished to repay student loans. But some types of money have exemptions that protect it from being taken by judgment creditors, including SSI, Veterans Benefits, railroad retirement benefits, and disbursements from Federal Student Aid.
Can student loans take your IRA? Money in your Individual Retirement Account (IRA) cannot be taken to repay your student loan debt. However, any withdrawals you take from your IRA will be treated as income during that tax year, which can increase your monthly payment under an income-driven repayment plan.
How to recover from student loan default
Until you get your federal student loans out of default, you remain at risk of student loan wage garnishment and having your income tax refunds and Social Security Benefits offset. In addition, you’ll be listed in the federal government’s debt collection system, CAIVRS, and that will prevent you from getting an FHA mortgage.
The U.S. Department of Education offers three options to bring federal student loans back into good standing:
- negotiating a student loan settlement
- applying for a Direct Consolidation Loan
- entering into the Loan Rehabilitation Program
Contact the Department’s Default Resolution Group to learn more about your possibilities for getting out of default.
Private lenders typically lack options to return a loan to good standing after it’s been in default. Your best chance to fix the default status may be to negotiate a settlement.
Tips for avoiding student loan default
Student loan default can quickly wreck your personal finances, even more so when a collection agency gets involved. That’s why you should avoid it at all costs. Here are some tips to help you do that:
- Ask for a deferment and forbearance. While most federal student loans are in forbearance due to the coronavirus, many borrowers with FFEL Loans and private student loans are still required to make payments. Ask your loan servicer what earn what options you have to temporarily pause your payments.
- Apply for a repayment plan based on your income. The federal government offers various options to get a lower monthly payment based on 10-20% of their discretionary income. Plus, those plans lead to loan forgiveness after 20 to 25 years of making monthly payments.
- Refinance your student loans. Refinancing your student loans may allow you to get a lower interest rate, a lower monthly payment, or both. Typically, you’ll need a good credit score and suitable income to qualify.
Ready to stop student loans from garnishing your bank account? Let me help.
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