When your scholarships, grants and student loans exceed the cost of your tuition for the semester, the school sends you a refund in the form of check or direct deposit into your bank account. If a creditor obtains a judgment from the court, they can attempt to levy your bank accounts. When your account is levied, the assets are frozen and then sent to the creditor. Federal benefits in your bank account are protected from most creditors, but only for a limited time.
Federal and Private Aid
Only federal forms of financial aid qualify as federal benefits, such as a Pell Grant, Perkins Loan or Stafford Loan. Private loans and scholarships awarded through private organizations instead of through the U.S. Department of Education are subject to levy. Your school may use your scholarships towards your tuition before applying federal grants and loans. Typically, schools apply scholarships towards tuition and fees before federal Pell Grants and loans. If you are not sure whether the financial aid is coming from the U.S. Department of Education, contact your school's financial aid or accounting department for specific information.
Federal Benefit Exclusion
Federal benefits are protected from creditors. Although financial aid refunds fall into that category, creditors in the past have been able to freeze these assets temporarily. In some cases, banks have sent the funds mistakenly to the creditors. On May 1, 2011, the U.S. Department of Treasury began limiting creditors' ability to levy federal benefits. Under federal law, banks that receive a levy request must review the past two months of deposits to check for federal benefits. If your account contains protected funds, the customer can use the money as they normally would. However, any non-exempt funds are frozen and submitted to the creditor. If you deposited the financial aid longer than two months ago, the creditor can levy it if it remains in your account.
If you owe child support, your financial aid and other exempt benefits are typically excluded from levy. However, if the state child support enforcement office included a Notice of Right to Garnish Federal Benefits with a levy, your financial aid can be seized. If the notice is included, the bank must forward the funds to the creditor. If there is no notice, the bank will need to follow the standard procedure of reviewing two months of account activity to search for any federal deposits.
If you owe a federal debt, such as to the Internal Revenue Service or the U.S. Department of Education, the government has the right to seize any money in your account, including exempt benefits. The two-month look-back provision does not apply to federal creditors. If you are subject to the levy, you will receive a notice in the mail before it occurs. When your bank account is levied, the funds are frozen for 21 days. You can arrange to pay or settle the debt during this time. If you are unable to satisfy the debt, the money is sent to the federal creditor. You can apply for a hardship if the money in your account is necessary for basic living expenses. You may need to provide proof of an eviction notice or utility disconnection letter.
- Federal Register: Garnishment of Accounts Containing Federal Benefit Payments
- IRS: Notice of Levies - Bank Levies
- Bankrate.com: Three Questions on Bank Account Levies Answered
- Financial Management Services: Treasury Offset Program - Payments Exempt by Federal Law
- California's Bankers Association: New Garnishment Exemption For Federal Benefit Payments