There is no statute of limitations for the collection of defaulted federal student loans. The U.S. Department of Education can legally pursue you for the outstanding balance on your student loans indefinitely.
This also applies to collection agencies working on behalf of the U.S. Department of Education. There also is no statute of limitations on collection if the Department of Education sells your federal student loan to a private collection agency. In this situation, a private collection agency buys your federal student loan debt. Even though the Department of Education no longer owns the debt, it still remains a federal student loan and is subject to the statute of limitations laws in the Higher Education Act. The length of the statute of limitations for student loans from private lenders depends on your state’s laws.
Bankruptcy
Federal student loans are not dischargeable in any chapter of bankruptcy. Private student loans funded through a government agency or a nonprofit organization also are not dischargeable in bankruptcy. However, it is possible to petition the court to discharge your student loans through an undue hardship motion. In an undue hardship motion, you have to prove to the court that repaying your student loans would cause extreme financial hardship to a point that you would be unable to maintain an adequate standard of living. You also likely have to prove that your current financial situation will not improve. Private student loans completely funded through a private lending institution are dischargeable in bankruptcy.
Wage Garnishment
Federal and private student loans are legally collectible through wage garnishment. The U.S. Department of Education does not have to obtain a court order before beginning the wage garnishment, but it must send you a letter notifying you of the impending garnishment. Current laws limit garnishments for defaulted federal student loans to 15 percent of your disposable income. Disposable income is your income after taxes and does not include voluntary deductions such as health insurance. Private lenders must obtain a court order before they can begin garnishing your wages. Current laws limit private lender wage garnishments to 25 percent of your disposable income.
Tax Refund Offset
The U.S. Department of Education can seize or offset both your federal and state tax refunds and credits. Private lenders may only offset your state tax refunds or credits. Private lenders must obtain a motion to offset your state taxes from a court in your state. The U.S. Department of Education does not have to obtain such a motion. Currently, there are no percentage limits as to the amount of tax refunds or credits that can be offset for both federal and private student loans. If necessary, the U.S. Department of Education and private creditors may seize the entire tax refund/credit amount.