Student loans can lead to serious financial consequences if you don't keep up with payments, including the potential for your assets to be seized. However, whether or not your assets are at risk depends largely on the type of loan, federal or private, and the steps you've taken (or failed to take) to address the debt.
Student loan debt can't be inherited, but if you have private student loans and the lender doesn't discharge the debt when the borrower dies, they could pursue money from the person's estate, which could reduce the size of an inheritance.
If you default on a federal student loan, then your wages or bank accounts can be garnished without a court order or judgment. The maximum that can be withheld for federal student loan garnishment is 15% of your disposable income.
Cars, computers, furniture, books, boats, appliances, clothing, and other personal property are not reported as assets on the FAFSA. Home maintenance expenses are also not reported as assets on the FAFSA, since the net worth of the family's principal place of residence is not reported as an asset.
The student should keep no cash or cash equivalents saved in their name. Students are punished by the FAFSA for saving any cash. The FAFSA will specifically ask “As of today what is the cash balance of checking, savings…” accounts for the student.
The FAFSA uses a snapshot of assets on the date the FAFSA is filed and the prior tax year income. The CSS/Financial Aid PROFILE form uses the last three years of income. On the FAFSA, the principal place of residence is not a reportable asset, so paying down the mortgage is a good way of making cash assets disappear.
When you fall behind on payments, there's no property for the lender to take. The bank has to sue you and get an order from a judge before taking any of your property. Student loans are unsecured loans. As a result, student loans can't take your house if you make your payments on time.
What Accounts Can the IRS Not Touch? Any bank accounts that are under the taxpayer's name can be levied by the IRS. This includes institutional accounts, corporate and business accounts, and individual accounts. Accounts that are not under the taxpayer's name cannot be used by the IRS in a levy.
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.
By transferring assets into a homestead-exempt property, you can shield those assets from certain types of creditor claims. Assets held within qualified retirement accounts such as 401(k)s, IRAs, and pension plans are often protected from creditors under federal and state law.
If a borrower dies, their federal student loans are discharged after the required proof of death is submitted. The borrower's family is not responsible for repaying the loans.
The federal government cannot garnish your pension, disability benefits, retirement accounts, 401k, etc.
Both federal and private student loans fall off your credit report about seven years after your last payment or date of default. You default after nine months of nonpayment for federal student loans, and you're not in deferment or forbearance.
The Department can collect from assets such as bank accounts and valuable property, and can place a lien on the borrower's real property. As a result of such a lien, the borrower may not sell the property until the lien is removed.
If you default on your student loan, that status will be reported to national credit reporting agencies. This reporting may damage your credit rating and future borrowing ability. Also, the government can collect on your loans by taking funds from your wages, tax refunds, and other government payments.
Bank accounts solely for government benefits
Federal law ensures that creditors cannot touch certain federal benefits, such as Social Security funds and veterans' benefits. If you're receiving these benefits, they would be exempt from garnishment.
If you refuse or don't provide them by the IRS deadline, the IRS can summons the records directly from your bank or financial institution. You can contest the summons (called “quashing” the summons) if you can show that the summons isn't for a legitimate purpose or that the information is irrelevant to the purpose.
Benefits paid to veterans and their families are non-taxable. These include: Education, training, and subsistence allowances. Disability compensation and pension payments for disabilities.
Yes, federal student loans may be forgiven after 20 years under certain circumstances. But only certain types of loans are eligible for forgiveness, and you must be enrolled in a qualifying repayment plan. You'll also need to stay out of default on your loans.
The Benefits of Fresh Start for Eligible Loans
Restores eligibility to receive federal student aid including Federal Pell Grants and work-study. Protects borrowers from wage garnishments and costly collection fees. Restores eligibility for future loan rehabilitation for borrowers who rehabilitated during the pause.
In certain situations, you can have your federal student loans forgiven, canceled, or discharged. That means you won't have to pay back some or all of your loan(s). The terms “forgiveness,” “cancellation,” and “discharge” mean essentially the same thing.
Principal homes, automobiles, and credit card debt are not considered for financial aid eligibility. It should be noted here that you should never keep assets in the child's name. This includes 529 college savings accounts.
Students selected for verification of their FAFSA form may wonder, “Does FAFSA check your bank accounts?” FAFSA does not directly view the student's or parent's bank accounts.
The SAI assumes parents should use up to 5.64% of their unprotected assets (those assets counted by FAFSA) to help their child pay for college. Furthermore, the FAFSA formula protects a portion of parents' non retirement assets, so these may have even less of an impact. This also depends on the type of asset.