A reader worries his state and local pensions will be garnished if he can’t keep up with his federal student loan payments.

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If I stop making payments on a federal student loan, can my state/county pensions be garnished? I know states have different rules for pension protection. I live in Nevada, but my pensions are from agencies in California.

George M. in Nevada

Andrew Pentis from Student Loan Hero responds…

In general, there are all sorts of penalties that come with ignoring your federal student loan payments, including garnishment. You could lose money owed to you through federal government payments, such as your income tax refund and Social Security (disability) checks, via a process known as Treasury offset.

The question – and it’s a good one, George – is whether you could also forfeit local and state government benefits.

Let’s examine whether your state or county pension would be put at risk by a delinquent or defaulted student loan balance and whether there’s a better way to handle that distressed debt.

Does unpaid federal debt affect state, county benefits?

The answer here, as with many things student loan-related, is: It depends.

The Department of Education warns borrowers of Federal Family Education Loans (FFEL) that their state income tax refunds and other payments – and even state-issued driver’s or professional licenses – could be impacted if their debt enters default.

What’s your federal loan type?

If your loan is a part of the Direct Loan program, you might feel better about the status of your pensions. Even if you owe a Perkins loan, which is lent directly by a college or university tapping federal funds, you could be better off.

But if you have FFELs, on the other hand, letting them sit unpaid could leave your state benefits open to garnishment. To check which ones could be vulnerable, contact the federally-appointed guaranty agency for your debt. You could find their contact information by logging into your StudentAid.gov account.

What type of pension do you have?

Although your Social Security benefits are indeed vulnerable to garnishment because of unpaid federal student loans, other types of retirement accounts could be immune.

You might contact the manager of your pension to determine whether it was established under the Employee Retirement Income Security Act. Its status could help you figure out whether creditors may be able to access your benefits, as a pension under ERISA might be less likely to suffer garnishment.

Keep in mind that even if you determine that your pensions are 100% safe from seizure, they’re only protected until they hit your checking or savings account. Once your regular pension payment lands in your bank, it’s cash that’s as susceptible to the hands of creditors as any other dollar would be.

What are your local laws?

Aside from figuring out your loan and pension type, the advice here would be to contact your localities about their laws regarding debt collection.

You mentioned, George, that your pensions originated in California, but you now reside in Nevada. At the very least, contact the county and state (California) to learn whether your pensions could be seized by Uncle Sam. At this point, you’ll be able to relay your federal loan type and pension details, as that’s likely to determine the outcome.

If you can’t get a straight answer from your state’s Department of Revenue or local legislature, you might look to consult a student loan lawyer.

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What are the consequences of not paying federal student loans?

Unfortunately, many other aspects of your finances could be adversely affected by letting your federal debt lapse.

In addition to falling prey to Treasury offset, defaulting on your federal student loan debt could cause any number of these problems:

  • Your loan balance will grow, due to accruing interest and collections costs.
  • Your credit report and score will suffer, making it harder to borrow funds, whether you’re refinancing your student loans or applying for a credit card or mortgage.
  • You’ll lose access to federal loan repayment safeguards, such as income-driven repayment plans, deferment, forbearance, and some student loan forgiveness programs.
  • Your wages could be garnished (if you’re currently employed).
  • You could be sued and brought to court, where you’ll have to pay potentially thousands of dollars in fees for collections and legal representation.

How to handle your federal loan debt entering retirement

Based on the premise of your question, George, I’m hopeful your federal loans are current. Better yet, I hope you do have Direct Loans that have been eligible for the coronavirus moratorium on repayment that began in March 2020.

Being current on your debt allows you to get ahead of any of the problems associated with halting repayment. Instead of asking what will happen if you ignore your outstanding balance, consider lowering or pausing your payments. Specifically:

Enroll in income-driven repayment (IDR): Picking an IDR plan, such as Income-Contingent Repayment or others, would decrease your monthly dues down to a set percentage of your disposable income.

Postpone your payments via deferment or forbearance: Whether you’re out of work or experiencing a different financial hardship, you could pause your monthly dues for an extended period.

Either of these options can be undertaken for free, simply by phoning your federal loan servicer. If your servicer is giving you the runaround, you could enlist the help of a low- or no-cost student loan counselor to help you evaluate your options and choose a strategy that protects your pensions and secures your retirement.

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About the Author

Andrew Pentis

Andrew Pentis

Andrew covers personal finance expert with a focus in student loans for Student Loan Hero. His work has appeared in 30-plus publications. He is interested in creating actionable content.

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