Disappearing student loan debt is a dream for many borrowers.
But for tens of thousands of student borrowers, that dream could become a reality. Billions of dollars in student loans may be wiped out because the lender — The National Collegiate Student Loan Trusts — didn’t keep track of the paperwork.
For the rest of the 44 million student loan borrowers in the US, however, such relief is unlikely to come.
Student loan debt is notoriously hard to shake. Unlike other types of consumer debt, discharging college debt is nearly impossible, even in cases of bankruptcy. Meaning, the government will follow you around your entire life until the debt is paid off.
Business Insider spoke with Joshua Cohen, a lawyer specializing in student loan debt, to understand the consequences borrowers may face if they default — miss nine consecutive monthly payments — on their student loans.
Cohen explained that if you default on your federal student loan, the government can come after you in four different ways.
1. W-2 wage garnishment
If you are W-2 employee, the government can garnish your wages with a 30-day warning, and it doesn’t need a lawsuit to do so.
Typically, a debt collector will call a borrower’s human resources department to verify employment status. That information is then passed along to a guarantee agency, which insures student loans against default, or to the US Department of Education. Once they have issued a warning to the borrower and waited 30-days, either one can collect on the debt by deducting payments directly from the borrower’s paycheck.
Cohen advises borrowers who receive a warning to immediately request a hearing on the wage garnishment. This temporarily stops the process and allows the borrower to work out an alternate payment strategy with the loan servicer.
“It’s quite messy,” he said. “If someone doesn’t quickly get on their feet during that 30-day period, the garnishment will probably happen.”
2. Federal tax refund garnishment
Employees who file tax returns normally look forward to getting their refunds back in the spring. But if you’ve defaulted on your federal student loan, don’t expect to get your refund, according to Cohen.
The federal government will use the refund amount to pay down the principal and interest on student loans in default.
“My advice on that is don’t file your tax return,” Cohen said.
He explained that if you’re due a refund, you have up to three years to file. Work on getting yourself out of default and then file the return. There’s no penalty to postpone filing your refund.
3. Social Security garnishment
If a borrower doesn’t work, but collects Social Security, the federal government can garnish that money as well.
“That’s really hard because you are dealing with people who are barely surviving as is, and now you’re taking more money from them,” Cohen explained.
He attributes this to a communication issue where not enough people know they qualify for income-driven repayment (IDR) plans.
IDR plans allow borrowers to pay a predetermined percentage of their income toward student loan bills each month. If your discretionary income isn’t above 150% of the poverty line, however, your payment will be zero until you start earning more.
The government’s last option for collecting on a student loan is to take legal action against you. It’s the situation most self-employed individuals find themselves in, according to Cohen.
Private loan collection operates separately from federal loan collection. Unlike the federal government, private lenders can’t garnish W-2 wages, tax refunds, or Social Security payments.
“The only remedy that a private lender has is to sue you, and they are suing you under state law and every state differs,” Cohen said.
His advice for borrowers whether they have federal or private student loans is to pay attention to mail and to answer the phone. If a borrower ignores calls they are taking a defensive position, rather than being proactive.
“It’s all about power and who has control,” Cohen said.