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What Happens to My Wage Garnishment and Tax Refunds and My Student Loan?

Written by Steve Rhode


Dear Steve,

Defaulted student loans, going through wage garnishments and tax offsets.

My main question that I can’t seem to get an answer to, of I enter into direct consolidation, what happen to the money that’s already been garnished? Does it just get lost to whoever the debt was sold to? Let’s say my initial total was $9,000 owed and I’ve already had $4,000 garnished, including income tax offsets, what happens to that?



Dear Amos,

Since we are talking about tax intercepts then this must be a federal student loan. When you student loan went into default a collection fee of about 19% of the balance was added. If you had gone into rehabilitation within 60 days you would have avoided that.

Payments are applied first to unpaid fees, then unpaid interest, and finally to the unpaid balance due.

Keep in mind the debt was actually not sold. It is still a federal student loan. The servicer might have changed.

You can always check on the current status of your loan by visiting the National Student Loan Data System.

In the case of the initial $9,000 balance there would have been about $1,800 added to the loan balance in fees when you defaulted. Then the interest would have been higher each month due to the higher overall new balance. Depending on the amount that was garnished it might be possible that the payment never made much progress towards reducing the overall balance owed.

If you want to avoid the tax refund intercept, just make sure to adjust your withholding to not get a refund.

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Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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