After lots of publicity about deadbeat college grads who didn't pay back their loans -- and cost the taxpayers almost as much as a few toilet seats on Navy fighters -- Congress decided to crack down. The Department of Education was given powerful tools to use against former students who don't make their payments.

Assessing Collection Fees

Grabbing Your Income Tax Refund

The IRS can intercept a refund only if the loan is held by a guarantee agency, the Department of Education or a collection agency working for one of those two. If your school, the lender, a loan servicer or a company on the secondary market has your loan -- even if you are behind on your payments -- your tax refund is protected from the clutches of the IRS.

Each tax year, the agency holding your loans must review your account to verify that you haven't made payments on your loans within the previous 90 days. Once it verifies this information, the agency notifies the IRS that your loans are in default.

If you are entitled to a tax refund, the agency will notify you that the IRS proposes to keep all or some of it. To object, you must present written evidence, within 65 days of the date on the notice, of any of the following:

• You've repaid the loan.
• You are making payments under a negotiated repayment agreement, or you've been granted a cancellation, deferment or forbearance.
• You have filed for bankruptcy and your case is still open, or your loans were discharged in bankruptcy.
• You are totally and permanently disabled.
• It is not your loan.
• You dropped out, and the school owes you a refund.
• You borrowed the money to attend a trade school and were either unable to complete your education because the school closed or you were falsely certified by the school as eligible for the loan.

Paring Your Paycheck

You can object to the garnishment if you've returned to work within the past 12 months after being fired or laid off. Call or write to the agency. If you have been continuously employed for the previous 12 months, you can raise one of the objections permitted when the IRS seeks to intercept your tax refund. (See above.)

You can also object to the garnishment if it would leave you with a weekly take-home pay of less than 30 times the federal minimum wage ($5.15 as of September 1), or $154.50.

The only other way to avoid wage garnishment is to contact the holder of your loan and negotiate a repayment schedule.

Getting Sued

You aren't likely to be sued, however, if the agency holding your loans determines that:

• the cost would exceed any amount it could get from you, or
• you have no assets that could be taken to satisfy all or a substantial portion of the debt.

In addition, the Department of Education forbids agencies holding defaulted student loans to sue unless:

• your income is too low to be covered by the wage garnishment and
• you have assets (other than wages) that could be taken if the Department of Education won the lawsuit and obtained a court judgment against you.

What property the Department of Education could take from you depends on where you live. In most states, the Department can go after your bank and other deposit accounts, and valuable personal property such as cars and antiques. The Department can also file the judgment with the county records office to create a property lien -- a notice to the world that you owe money. In some states, a judgment entered against you automatically creates a lien on any real estate you own in the county where you lost the lawsuit. In other states, the creditor must record the judgment with the county. When you sell or refinance your property, all liens must be removed, usually by paying the lienholder -- before the deal can close.

Getting Help

If you need help with a defaulted student loan, contact the Department of Education's Ombudsman at 877-557-2575.