If you don't make payments on your student loans, they can enter default. At that point, the lender will have more power to collect, including the ability to take some of your money before you ever see it. There are two ways that can happen: wage garnishment takes the money out of your paycheck, and offset takes it out of income tax refunds or other government payments.
Defaulted federal student loans are subject to wage garnishment: Your employer can be obligated to send a portion of your income directly to the loan holder to pay your loan. And it can be a lot of money—up to 15% of your disposable (take-home) pay. If you're normally bringing home $500 a week, that means $75 could go to your loans before it goes to you.
For federal student loan debt, wage garnishment does not require a court order. Funds can be taken without your permission, but you will receive information regarding the amount being garnished. You will also be given instructions on how to appeal either the garnishment order itself or the amount being taken.
The U.S. Department of Treasury can seize government payments to repay defaulted federal student loans. Different kinds of government funds can be garnished, such as federal travel reimbursement, but the most common are federal tax refunds and Social Security payments. Some states also have garnishment programs, and state payments can be taken as well.
Up to 100% of your tax refund can be taken, and you can still be subject to this offset even if your wages are also being garnished. Funds can be taken without your permission, but you will receive information regarding the amount and date of your offset. You can challenge your offset if it will cause financial hardship or for a number of other reasons. It's best to do so as soon as you get the notice about the offset process.
What You Can Do
You may be able to avoid having your wages garnished or tax refund or other federal or state benefits seized if you set up a satisfactory repayment arrangement and begin making payments. Payments made under a voluntary payment plan are often lower than the amount taken through garnishment and can lead to resolving the default altogether through rehabilitation or consolidation. And it may save you from some of the other consequences of default, too. Keep in mind that if you enter a rehabilitation agreement to get your loans out of default and your wages are already being garnished, you will need to make five payments in full and on time before the garnishment stops.
To get started, contact your loan holder. You can find out who this is by going to the National Student Loan Data System (NSLDS®) and looking up your guarantor. If no guarantor is listed, your loan holder is the U.S. Department of Education, and you should contact the Direct Loan program.
You can also learn more about offset from the official Federal Student Aid website.