Federal student loans are considered the preferred way for students who must borrow because they are often much cheaper and considered “safer” than private loans. But there are hidden dangers lurking within these loans that you need to be aware of. Because they are guaranteed by the federal government, they offer the government collection powers that ordinary creditors and collectors only wish they had. A reader recently wrote to us:
I am facing a crisis. I will be 66 in September. I am presently receiving Social Security and a small VA monthly pension. The Dept. of Education is threatening to garnish my income by the end of this month. I don’t really know what I’m going to do. What can I do to stop them?
While “private student loan lenders can’t touch your Social Security income,” the federal government can go after your Social Security payments to collect delinquent federal loans, explains attorney Joshua R. I. Cohen, a consumer law attorney who specializes in student loan law. This is part of the “Treasury Offset” program that also allows tax refunds to be intercepted to offset delinquent federal student loans.
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There are limits to how much Social Security income can be taken each month, though. According to the website StudentLoanBorrowerAssistance.org:
The government cannot take any amounts you get below $9,000/year or $750/month. No more than 15% of your total benefit can be offset.
In other words, if you receive Social Security payments of $750 or less per month, the federal government wouldn’t be able to take anything from your Social Security checks. If you received $1000 a month, though, they would do two calculations: The total benefit minus $750 ($1000 – $750 = $250) and 15% of the total benefit ($1000 x .15 = $150). Since they can offset the smaller of those two amounts, the maximum offset in this example would be $150/month.
Veteran’s benefits, including our reader’s VA pension, on the other hand, are exempt (or “safe”) along with other benefits such as Supplemental Security Income (SSI). A list of exempt benefits is available here.
If you receive a notice of offset from the Department of Education, it’s important to act quickly. You have just twenty days to request a review. If you do, you’ll be given the opportunity to review your account records, demonstrate why your loan isn’t in default or is not enforceable (if that’s the case), and to avoid offset by arranging to repay the loan. Most importantly, requesting a review will halt the offset until it is completed. If you don’t respond during that short window, you can still request a review later, but it won’t stop the offset.
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For someone relying on a limited income such as Social Security, anything that reduces their income can be devastating. So what can you do to reduce or suspend an offset? Cohen offers two suggestions:
- Temporary Fix: Demonstrate to the Department of Education that the offset will create a hardship. You’ll likely have to fill out a detailed financial hardship form, and it’s important that you fill it out as completely as possible. The Department of Education may require other information, so follow the instructions you receive carefully. If you are granted a reduction or suspension due to hardship, it will be good for twelve months, and must be renewed every year.
- Permanent Fix: Get out of default. Once you get your federal loan out of default, you can apply for income-based repayment which could bring your payments down to zero, Cohen explains. That program also comes with loan forgiveness for balances remaining after 25 years.
To get out of default, you may be able to consolidate or rehabilitate your loans. Either way, you only get one shot so it’s crucial that try to find a solution that will work for you in the long run. This worksheet summarizes the pros and cons of consolidation and rehabilitation. Again, if you successful in consolidating or rehabilitating your loans, you will then be eligible to apply for programs like Income Contingent or Income-Based Repayment Plans, which can lower your monthly payments to as little as zero.
Getting nowhere in your efforts to rehabilitate your federal student loan? You may want to talk with a consumer law attorney. “You have the legal right to cure your loan and get it out of default so take advantage of it,” says Cohen.
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Image: nick wiesner, via Flickr