There are two kinds of student loans: Federal and private. They are treated differently and follow different rules. Knowing what kind of loan you have will help you figure out what your options are. Here are some tips for finding out which kind of loans you have:

• You can log in on Federal Student Aid to access the U.S. Department of Education’s database for student aid. You can look here to find out if you have any federal student loans. This will only give you information about FEDERAL student loans, not private loans.

• If you don't know what loans you have, check your credit report. You can get one free credit report every year. Request your free credit report.

• One sign that a loan is private is if you have a co-signer. Federal loans do not have co-signers.

• There are different types of federal loans (Direct, FFEL, Perkins, Stafford, PLUS, etc.). To figure out what type of federal loan you have, look at the promissory note and application, or log into your account on studentaid.gov.

• You can also look at the top of your monthly bill – the name of the program should be listed there.

• If your interest rate is above 8.5% you may have a private loan rather than a federal loan.

If you have federal loans and can't afford your loan payments, you may want to look at some of the income-based repayment plans available for most federal student loans. It is much easier (for you, and for your credit) to set up affordable payment plans before your loans go into default.

Affordable Repayment Plans for Federal Student Loans

Federal student loan programs have many protections, including affordable repayment plans. You can go to studentaid.gov to figure out which type of repayment plan you may be eligible for, and to learn more about each plan.

You may also want to visit these other resources to learn more:

Student Loan Borrower Assistance.org

Consumer Financial Protection Bureau

What does it mean to be in default

Federal Loans:

• Default means that you have broken the terms of your student loan agreement.

• What will happen during default is different depending on the kind of loan you have.

• Most federal loans won't go into default until you haven't made a payment for several months.

Private Loans:

• Default is different for private loans.

• Default can happen much sooner than with federal loans.

• You should read your private loan contract to learn what terms apply to your private loan and what your rights are.

• Private student lenders are more likely to sue as the main way to collect. They may also use collection agencies.

Cancellation/Discharge

Loan cancellation is only possible in some limited situations. It will probably affect your income taxes. If you are eligible for cancellation, you should talk with a tax professional before you make any decisions.

There are a few different kinds of discharge/cancellation:

• School related discharge: This type of discharge is available when your school has done something wrong. This is called "school misconduct." To apply for this kind of discharge you need to complete an application form for school-related cancellation. These are the situations where you can apply:

  • Closed schools: The school closed while you were attending, or you withdrew shortly (not more than 90 days) before it closed. Loan Discharge Application: School Closure.

  • False certifications: The school falsely certified your eligibility for federal student aid. In other words, they told you and the federal government that you were eligible for loans, but you weren't. Loan Discharge Application: False Certification (Ability to Benefit).

  • Unpaid refund: If you didn't go to school for the entire loan repayment period, and your school didn't refund your un-used loans to the lender. Loan Discharge Application: Unpaid Refund.

• Borrower defenses: If your school misled you or did certain things wrong, you may have a “borrower defense to repayment.” This means you could get forgiveness of some or all of your federal student loan debt. This could include refunding amounts you have paid. Learn more about borrower defenses. You can download the application and submit it to the Department of Education by email or mail, or you can log into your Federal Student Aid account and complete the application there.

• Public Service Loan Forgiveness: Some kinds of work at non-profits or in the public sector, including military service, allow your loans to be forgiven after 10 years of payments. Learn more about public service loan forgiveness.

• Serious disability or death: This may allow your loans to be discharged, or not passed on to your family. You can read more about this in the "Disability Discharge: A Closer Look" section of this guide.  You can also visit StudentAid.gov to learn more about this kind of loan discharge.

For more information on your cancellation options, you can visit https://www.cancelmystudentdebt.org/paths-to-cancellation or studentaid.gov.  

What can I do to get out of default?

For federal student loans, there are a few things that can help you get your loans out of default. Once you are out of default, you will be eligible for repayment options that require loans in good standing.

There are normally two options to get out of default: consolidation and rehabilitation. However, right now there is a third, easier option: Fresh Start. Fresh Start just requires calling your loan servicer and asking to enroll in Fresh Start to be transferred to a non-default servicer. 

Consolidation

Consolidation means you can combine all of your loans into one new loan. Consolidation is an option up until the time that you get a garnishment order.

Note: If you consolidate your federal loans into a private loan, you will lose your rights under the federal loan programs. If you have a choice, you should probably avoid private loan consolidation.
 

More About Federal Consolidated Loans:

• You must have at least one Direct loan or FFEL loan to be eligible for a federal consolidation loan.

• Once you get a consolidation loan you won't be listed as in default on your credit.

• You also won't be at risk of having your taxes offset or your wages garnished.

• Your credit report will still show that you were in default. This will be on your report for 7 years.

• You can only use federal loan consolidation once.

• A fee of up to 18.5% may be added to the total balance.

To consolidate a defaulted loan into a federal consolidation loan, you must either:

• Make a repayment agreement with the current servicer, or

• Agree to repay your new direct consolidation loan under an Income Driven Repayment Plan (Saving on a Valuable Education, Pay As You Earn Plan, Revised Pay As You Earn, or Income-Contingent Repayment Plan.

Rehabilitation

You can also get your loan out of default through rehabilitating. The terms of the rehabilitation depend on the type of federal loan you have. You must request rehabilitation from the holder of the loan. You can find their contact information here.

Payments Under Rehabilitation:

• Your payments under the rehabilitation plan are 15% of your "discretionary income."

• The loan holder will ask for your Adjusted Gross Income (AGI) to figure out what your "discretionary income" is.

• You can request a lower monthly payment based on your income and expenses.

• While the payment pause is still in effect, you may be able to do a “streamlined” rehabilitation, which means you can rehabilitate your loans in less than 9 months.

Benefits of Rehabilitation:

• Rehabilitation can help lift a garnishment order. A garnishment order will be lifted after you make five payments  (in addition to the amounts that are being garnished) under the rehab plan.

• To get out of default, you need to make nine payments during ten consecutive months under the rehab plan.

• If you are a qualifying military member, you are allowed an interruption of the consecutive period and may resume rehabilitation once service is completed.

Costs and Credit:

• Fees of up to 16% may be added to the balance of the loan.

• The record indicating that you were in default will be lifted from your credit report after you successfully rehab your loan.

• You can use rehabilitation to get out of default only once per loan.

Fresh Start

• The Department of Education is giving some borrowers another option to get out of default once the payment pause comes to an end. 
  • If your loans are still in default after the payment pause, you may need to call the Default Resolution Group and say that you want to enter an Income-Driven Repayment Plan and be transferred to a new loan servicer. 
• You can learn more about this Fresh Start on studentaid.gov/announcements-events/default-fresh-start  

It's possible that you can be sued for defaulted federal student loan debt, but it is more common to be sued by private lenders. If you are sued for private student loan debt, you may have defenses. It’s also important to understand what could happen if the lender is able to get a judgment against you.

If the private lender (or corporation that bought your private student loan debt) gets a judgment against you, some income and assets are protected from collection. Go here to learn more about what income and assets are protected.

Defenses

Standing

The Plaintiff is the person or company that sues you. This might be your original lender, or another party that bought your debt. They need to prove that they have the right to collect the debt.

If the Plaintiff isn't your original lender, they must have "sufficient evidence" to prove that they are legally able to collect on the debt. They need documents like the original promissory note and proof of the chain of buying and selling of the debt, between them and the original lender. Basically, they need to be able to prove that they actually "own" your debt, and that it is actually your debt.

Statute of Limitations

There is a time limit on private student loan collections. Usually, the time limit to sue on a debt in Maine is six years after you last made a payment or took action on the account. Some private student loan contracts have other kinds of rules and time limits that might apply. These limits could be longer than six years.

This defense could be complicated. You should talk with a lawyer if you can. It is important that you know the date of last payment or the date of default in order to determine whether you might be able to use this defense.

Other

You may have other defenses, like:

• forgery
• the amount is wrong
• the debt has already been discharged

You can learn more about these private student loan collection here.

If you got behind on making your student loan payments, your wages, benefits, and tax refund can be garnished. This is called “involuntary collection”

The federal government has very powerful collection tools and it can use them without a court order and with no time limits!

Different kinds of collections, and what you can do about them

Tax Offsets

What are they?

The tax offset program allows the government to take your tax refund if you are in default on federal student loans. They can even take tax refunds from programs like the Earned Income Tax Credit.

What can I do?

If you get a notice of an offset:

• You can request a hearing once you receive notice of a tax offset.
• You must file a request for a review at the address written in the offset notice 65 days after the date of the notice or 15 days after a request to see the loan file, whichever is later.
• You must make a request to see the loan file within 20 days of getting the offset notice.

If you get a warning notice:

• Several months before the tax offset, you will get a written notice to warn you about the tax refund offset and other collection methods. You will probably only get one written notice. A tax offset can happen any time after you get that notice – even years later, as long as you are in default on a federal student loan.
• To find out whether your account has been flagged for a tax offset, you can call 1-800-304-3107

To avoid a tax offset:

• Establish a repayment plan
• Try to get out of default
• Request a hearing and raise defenses

You can challenge a tax offset if:

• You have entered into a repayment agreement and have started making payments
• The school failed to make a refund that was owed
• The borrower is deceased or totally and permanently disabled
• Extreme financial hardship exists
• The loan is not enforceable (e.g., forgery)
• Borrower defense to repayment (e.g., school misconduct)
• Borrower is eligible for a discharge (closed school or false certification discharge)

Wage Garnishment

What is it?

• 270 days after missing a payment, your loan goes into default.
• Once this happens, the government can take a certain percentage of your wages to pay off the loan.
• 15% of your "disposable pay" can be garnished. But 30 times the federal minimum wage, or $217.59 per week, is protected.

What can I do?

• You can request a hearing once you get a notice of wage garnishment.

  • For FFEL loans, garnishment won't start if you request a hearing within 15 days of the notice.

  • For Direct loans, garnishment won't start if you request a hearing within 30 days of the notice.

• You may be able to challenge the garnishment if:

  • You are within the first 12 months of having a job again after you lost your last job.

  • You are making payments toward a repayment agreement.

  • The school didn't pay a refund.

  • You shouldn't have to pay because of death or total and permanent disability.

  • You have a borrower defense to repayment (like school misconduct)

  • The loan isn't enforceable (forgery, etc.) or is dischargeable (closed school or false certification)

  • You have a financial hardship

• More about Financial Hardship

  • If a garnishment order is issued, the Department of Education won't consider your request for financial hardship for six months.

  • A hardship should be granted if your income is less than or equal to your expenses. You will need to give the Department a Financial Disclosure. Make sure to back up any expenses you claim (like rent, utility bills, etc.) with as much proof as possible.

  • To make a decision about whether or not to grant your hardship claim, the Department will compare your expenses to national averages. If your expenses are different than national averages, you should be ready to explain why.

  • The Department uses averages that are determined by the Internal Revenue Service. You can learn more about these average expenses on the IRS website.

Federal Benefit Offset

What is it?

• "Offset" means the government will withhold a part of your benefits to go toward your loans.
• Federal benefit offsets include withholdings from Social Security benefits, benefits under Part B of the Black Lung Act, and some Railroad Retirement.
• No amount below $9,000 a year or $750 a month can be taken.
• Supplemental Security can't be taken.
• Some other benefits can't be taken, like low-income housing assistance payments. Read the complete list of protected benefits here.

What can I do?

• When you get a notice of offset:

  • You must request a review within 20 days of getting the notice.

  • You have the right to set up a repayment plan with the loan holder before the offset takes effect.

  • Request a hardship

    • The type of form you'll need to do this depends on the type of loan.

    • For FFELs you can use the Financial Disclosure Statement.

    • For Direct loans held by the Department you will need to use the Statement of Financial Status.

• You may be able to have the offset suspended

  • You must send the following:

    • Notification letter showing the amount of the federal benefit

    • Proof of yearly income

    • Financial statement (within 10 days) – if the situation is an emergency, may submit equivalent information such as an eviction notice or a court order of foreclosure in writing with the completed financial statement

    • A letter explaining any exceptional circumstances with supporting documentation

Can't pay your federal student loans because you are disabled and can't work? Do you expect these disabilities to last for a while?  You may be eligible for what is called a Total and Permanent Disability (TPD) discharge of your student loans.

What loans are eligible for disability discharge?

This disability discharge is only available for these student loans:

• Federal Family Education Loan Program (FFEL)
  • Subsidized and Unsubsidized Stafford Loans
  • PLUS Loans for Parents
• Federal Direct Loans
• Federal Perkins Loans
• TEACH Grant Service Obligation

Don't know what kind of loan you have – here's how to find out.

To qualify for a Total & Permanent Disability (TPD) Discharge, you need to show documentation from one of these three places: 

• Veteran Affairs (VA) 
• The Social Security Administration (SSA) 
• A physician certification (by an MD, DO, NP, PA, or certified psychologist) 

How do I apply?

• You can apply for a disability discharge through Federal Student Aid’s Disability Discharge website.
• Or you can submit a paper application to the Department of Education.
• Most of the information you'll need for this application is very basic.
• The one piece that can be tricky is knowing what to submit to prove that you have a disability.

How do I show that I have a disability?

There are three ways to show that you have a disability:

1. If you served in the military, you can show documentation from the Department of Veterans Affairs (VA). You need proof that you get disability benefits because you are unemployable because of a service-connected disability.

2. If you get Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits, you can submit your Benefits Planning Query (Form 2459), or other documentation if it shows that you have been determined disabled at least five years ago. 

If you do not receive any disability benefits, or your award letter says your disability benefits will be reviewed more frequently than every 3 years, you need to use option three to provide proof of your disability. 

3.  You can submit a physician certification form on page 3 of the Disability Discharge application packet.  Your physician must check the box saying you have a mental or physical impairment that prevents you from being able to work, and that the disability can either be expected to result in death, has lasted five years, or is expected to last for at least five years. You can have an MD, DO, PA, NP, or certified psychologist complete the form. 

How do I submit my application?

Submit your application to the Department of Education, not your loan servicer. You should send your application to:

U.S. Department of Education - TPD Servicing
P.O. Box 87130
Lincoln, NE 68501-7130

You can also email your application to [email protected] or fax it to 303-696-5250. If you need to call Nelnet about the disability discharge process or application, you can call them at 1-888-303-7818. 

What happens after I submit my application?

After the Department of Education gets your application, they will:  

1. Contact the holders of your federal student loans and/or TEACH Grant Service Obligation and tell them to stop collecting from you. This is while they figure out if you are eligible. This means you will not need to make payments on your loans while they look at your application.
2. They will review your application and supporting disability evidence. Nelnet or the Department of Education may reach out to you if they need more information. 
3. Once they have all of your documents and have determined that you may meet the eligibility requirements for a disability-based discharge, they will make a final decision.

I have been approved! Now what?

After you are approved, your next steps depend on why you were found eligible.

Option 1: You were found eligible because of VA Unemployability:

• The Department of Education will notify the holders of your loans.
• After they are notified, they will discharge your loans.
• The Department of Education will also tell the loan holders to return any loan payments you made after the date the VA found that you have a disability. This date is the “effective date” of your unemployable award from the VA.

Option 2 and Option 3: My discharge application was submitted based on Social Security or physician statement.

• The Department of Education will notify you and the loan holders.
• They will tell the loan holders to return any loan payments you made after you were awarded SSI or SSDI, or after your doctor certified your discharge application (depending on the kind of proof of disability you submitted).
• Your loan holders will transfer your loans and/or TEACH Grant service obligation to Nelnet for discharge.
• You will then be subject to a 3-year post-discharge monitoring period that begins on the date the discharge is approved.
  • If you take out any new federal loans within the three year post-discharge monitoring period, your loans will be reinstated.
  • If you don’t take out new loans, your discharge will officially go through at the end of those 3 years.  

The department may also reinstate your loans if:

• You get a notice from the SSA that you are no longer totally and permanently disabled.

You can learn more about disability discharges here: https://www.studentloanborrowerassistance.org/for-borrowers/dealing-with-student-loan-debt/loan-cancellation-forgiveness-bankruptcy/cancellation-forgiveness-options/total-permanent-disability/  

Federal Taxes, the IRS and your Loan Discharge

Usually when a debt is discharged, the amount that was discharged will count as income in the year it was approved. But between 2021-2025 if you discharge a student loan the amount will not be counted as income.

Normally you would get a 1099-C after your loan is discharged. You would then need to file your 1099-C with your federal tax return for the year your loan was discharged. You may be able to file for an exception, for example, if you are not able to pay your debts.

You may need help filing your return. Find free tax help in your area.