What Can I Do If My Student Loans Are in Default?

What Can I Do If My Student Loans Are in Default?
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Last updated: August 2009

What Happens If My Loan Goes into Default?

Loans can be different, but if you miss one or more payments on your loan and you do not have a deferment or forbearance, your loan may be in "default." This may happen before or after it is transferred for collection or sold to another lender. If your loan is in default, your loan will usually go to the following places:

First, your loan will be sold to the state or to a private guaranty agency that acts as the middle man for your loan. If there was no state or private guaranty agency for your loan, it will usually be sold directly to the United States Department of Education.

Second, the guaranty agency may transfer for collection or sell your loan to the United States Department of Education. Similarly, the United States Department of Education may transfer for collection or sell your loan to the state guaranty agency. This can go back and forth several times.

Third, as if that was not confusing enough, either the guaranty agency or the United States Department of Education can transfer your loan for collection to a servicing company (see above). Often, the United States Department of Education and guaranty agencies use the same servicing companies, so you might get notices from the same servicing company about different loans.

OK, I Know Who Has My Loan. What Can They Do If I Am in Default?

When you are in default, the guaranty agency or the United States Department of Education can do any or all of the following:

Refer Your Loan for Collection:

They may refer your loan to a servicing agency. The servicing agency will then try to collect the loan from you. The servicing agency will usually contact you by letter and/or by phone asking you to pay the full amount, a part of the amount, or enter into a repayment plan.

Report Your Failure to Pay to a Credit Bureau:

Your failure to pay your student loan can be reported to a credit bureau (a credit reporting agency). A credit bureau is not owned by the United States Department of Education, nor is it part of the guaranty agency. Instead, a credit bureau is another business that gathers a computerized record of all the bills that you have or have not paid off on time. This record is often called your "credit report" or "credit history."

Your credit report is important because it is what other companies, including banks, stores, and credit card companies look to when deciding if they should or should not give you credit. But before your loan can be reported to the credit bureau, you must be given notice and a chance to enter into a repayment agreement. The notice will also tell you that you have 60 days to ask the government for an "administrative review" to make sure that their information about the debt is correct. 

Take Your Income Tax Refunds:

The United States Department of Education or a guaranty agency can take, or "intercept," your income tax refund, including your earned income tax credit. They do not have to get a court order to do this. First, they must send you a notice that says that they are going to intercept your tax refund and give you a chance to fight this decision. You may be able to stop the tax intercept if:

  • The debt has been paid;
  • The social security number is wrong;
  • The school closed while you were going there;
  • The school did not pay a refund;
  • The loan was discharged in bankruptcy; or
  • The loan agreement was forged (someone faked your signature).

There is only one way to make sure a tax refund is not intercepted: lower the amount taken out of your paycheck for taxes each pay period to make sure there will be no tax refund for the government to intercept. For example, if you got a $1,200 tax refund last year, ask your employer to take out $100 less each month this year.

Sometimes a husband and wife file their tax return jointly, but only one of them worked during the year. If the tax refund is intercepted because of a student loan debt of the other spouse, notify the Department of Education of this to get the tax refund released.

Garnish Your Wages:

Money can be taken out of your paycheck to pay back your loans. This is called "wage garnishment." This can be done without a court order. But you do have a right to a hearing before the money is garnished. To get this hearing, you have to request it by filling out the Request for Review form that you will be sent before your wages are garnished. This form will be sent to the address that the United States Department of Education has on file for you, so if you want to be sure that you get this notice, you should make sure that the address the United States Department of Education has is correct.

According to The Higher Education Act, your employer cannot take any money out of your paycheck if your income is less than $217.50 each week (30 times the federal minimum wage of $7.25). If you earn more than this amount per week, your employer can take out the smaller of these two amounts:

  • 15% of your weekly wages, or
  • The amount of your take-home pay over and above $217.50 weekly

Take Your Social Security Benefits:

The government can take some of your Social Security benefits each month. While part of your Social Security benefits can be taken, your Supplemental Security Insurance (SSI) benefits cannot be taken. The amount of Social Security benefits that can be taken is limited to:

  • 15% of your monthly benefit payment, or
  • The amount of your monthly benefit check above $750, whichever is less

Sue You in Court:

Like any other bill you may owe, if it is not paid, you can be sued in a court of law. If you are going to be taken to court, you will get what is called a "complaint" and a “summons” from your local Sheriff. A complaint is a document filed by a person or an agency saying that they believe that you owe them money, how much they believe that you owe and why. If you get a complaint and summons, you should talk to a lawyer.

Note: If you have been sued in Cook County, Illinois by the Illinois Student Assistance Commission (ISAC) and you want to try to get the lawsuit moved to the county in which you live, you should fill out a Request for Transfer form and send it to ISAC. Click on the title below to view a Request for Transfer form:

Request for Transfer Form

A written request for transfer will be on time only if it is postmarked no later than 30 days after the date you were served with the Summons. If you file your request for transfer on time, the Student Assistance Commission will ask the Cook County Circuit Court to transfer the case to the county where you live. You will not need to go to the Cook County Circuit Court if you file a request for transfer on time. You should mail the form to the attorney for the Student Assistance Commission as shown on the face of the Summons or directly to the Commission at the following address:

Illinois Student Assistance Commission
James R. Thompson Center
100 West Randolph Street
Room 3-200
Chicago, Illinois 60601-3293 

OK, I Am in Default and Understand What Can Happen. What Should I Do?


Discharge Eligibility:

Check to find out if you can qualify to "discharge" your loans. Discharges are not easy to get, but if you get one, then your loan will be treated as if it never existed. You can apply for five types of discharges, as explained below. Call the United States Department of Education at 1-800-433-3243 for an application to discharge your student loans or ask the holder of your loans for one.

Closed School Discharge:

If the school you were going to closed or if you left your school within 90 days of its closing, you may be able to get a "closed school discharge." To find out the official date of a school’s closing, contact the Department of Education. If a student loan is discharged under the closed school provision, the loan will be cancelled and you can get a refund of all payments you have already made on this loan, including any tax refunds that the government has intercepted. You can get an application for a closed school discharge from the guarantor agency (the holder of the loan) and you should fill it out and return it to them.

Inability to Benefit Discharge:

If your school falsely certified your ability to benefit from its instruction then you may be able to get your loan discharged. The most common example of this is if, when you entered the school, you did not have a high school degree or a GED and you did not pass an ability-to-benefit test given by the school. Another example is if something stopped you from benefiting from the school course; for example, you went to a truck driving school and you had a criminal record and were not eligible to get a truck driver’s license. Ask the holder of your loan for an application for an "inability to benefit discharge."

False Certification Discharge:

If your signature was forged (faked) on either your loan application or a loan check, you may be able to get your loan discharged. Ask the holder of your loan for a “false certification discharge” application.

Unpaid Refund Discharge:

If you enrolled in a school but never attended, or withdrew early enough to get a refund, but no refund was given to you, you may qualify for a discharge equal to the amounts that should have been refunded to you by the school. Get an application from the holder of the loan. You also are required, within 120 days from the date you file the application, to try to resolve the problem with the school, if it is still open.

Disability Discharge:

If you are totally and permanently disabled, and unable to find work because of your disability, you may be able to get a "disability discharge." A physician must certify that you are unable to work because of an illness or injury that will probably continue indefinitely or cause death. There is a three year waiting period; if your application is accepted, you will get a three year “conditional discharge.” If your health does not get better during those three years then you can get a “final discharge” of the student loan. The fact that you are receiving disability benefits from Social Security or SSI does not mean that you will automatically get a discharge of your student loan because the decision is based on a different standard. If your application for a disability discharge is denied, you have the right to appeal that decision.

What Does It Mean to Consolidate My Loans?

If you cannot get your loans discharged, then you should think about "consolidating," or combining, all of your loans into one Federal Direct Consolidation Loan. The Federal Direct Consolidation Loan is set up for people who cannot afford to repay old student loans. The advantage of consolidation is that it replaces all of your old loans with one new loan on which you make payments. It also takes your loans out of default, stops all future wage garnishment and tax intercepts, and even helps your credit history. Finally, if you make six monthly payments in a row, you can get new student loans if you go back to school.

You can consolidate your loans even if you only have one student loan. Also, if you apply for a consolidation you can qualify for the Income Contingent Repayment Plan (“ICRP”). This means your new loan payments will be based on your annual income. If your income is below federal poverty level, you will not be required to make any monthly payments on the loans. Loans with ICRP payments are cancelled after 25 years. To apply for consolidation, call the United States Department of Education at 1-800-557-7392 or you can apply on the Federal Student Aid website.

Will a Bankruptcy Get Rid of My Student Loans?

Yes, but the law now makes it very hard to get your student loans discharged through bankruptcy. You can only discharge your student loans if paying them off creates an "undue hardship" on you and your dependents (children).

The bankruptcy courts have been very strict about this. You must show the court that you cannot maintain a "minimum standard of living" if you have to repay the loans. This means, for example, that you cannot afford to pay the loans and pay for your rent and food. You must also show that you have made "good faith efforts" to repay the loans. This means that you have done everything you can to make the payments, but have still not been able to pay them.

Can a Lender Still Collect If I Haven't Heard Anything about My Student Loans for over Ten Years?

Yes, unfortunately, there is no expiration date or "statute of limitations" on student loans. So, until the loans are paid, discharged, or taken care of in bankruptcy, they will never go away.

Where Can I Get Information about My Loans If I Have Lost All or Part of My Records of My Student Loans?

Getting records of your student loans, especially if they are more than 2-3 years old, can be hard because they can be sent to a lot of different agencies before you are contacted. Always try contacting your lender first. If they do not have the information you need, there are some other places you can try:

Contact the United States Department of Education:

If you want to find out about your student loans and how much is due on them, call 1-800-4-FED-AID or access this information on the internet at the National Student Loan Data System.

Contact the Illinois Student Assistance Commission:

In Illinois, the agency that guarantees most, but not all, of the student loans is the Illinois Student Assistance Commission. You can contact them at: 1-800-899-4722.


Unless you are able to discharge your student loans, the odds are that you will eventually have to do something about them. They will not go away and over time the amount you owe will get bigger as interest and collection fees add up. Your best option is not to ignore your student loans but to do something about them. Many legal aid offices can help low-income persons with their student loan problems. Search the "Helpful Organizations" section below to find free legal help.

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