Your tax refund could be at risk if you’re severely behind on student loan payments, as the federal government has the authority to seize tax refunds for collection. This is a growing concern as student loan repayments change and pandemic-era relief programs have expired.
Borrowers who are in default on student loans should understand tax refund offsets and how to avoid them.
When the Government Can Take Your Tax Refund
The federal government can take your tax refund to pay student loan debt under specific conditions. Your refund may be seized if you have federal student loan debt in default.
Federal debt collection law allows the U.S. Department of Education to request that the U.S. Department of the Treasury intercept tax refunds through the Treasury Offset Program. The federal government isn’t limited to seizing your tax refund. Other federal payments, including Social Security benefits, can also be seized.
“When the government offsets a tax refund, it is applied to any government debts,” says Ashley F. Morgan, a debt and bankruptcy lawyer in northern Virginia. “For student loans, the government will offset tax refunds for any federal loans.”
The Treasury Offset Program applies only to federal student loan defaults, not to private student loan defaults.
“Examples of federally held student loans are those from the Federal Direct Loan Program, the Federal Family Education Loan Program and the Federal Perkins Loan Program,” says Jeni Burckart, vice president of health care and work services at student loan benefits platform Tuition.io.
A few late student loan payments aren’t enough to have your tax refund seized, as your loan must be in default to fall under the Treasury Offset Program. Most federal student loans fall into default if you haven’t made scheduled loan payments for at least 270 days.
[Read: Best Student Loan Refinance Lenders.]
How Tax Refund Offsets Work
It shouldn’t be a surprise if your tax refund is seized for a defaulted federal student loan. Borrowers are notified that funds will be collected with a Treasury offset.
A notice of intent to offset is sent to your last known address, explaining the offset 65 days before it begins. The notice will also explain the debt, the collection plan, and your right to challenge the action or resolve the default.
“The notice is typically only sent once, and the offsets will continue until your debt is paid in full or the default status is resolved,” says Morgan. “For many, you may have received this offset notice prior to COVID-19 and before the collection of defaulted student loans was paused.”
Not sure if your loans are in default? Log in to your account at StudentAid.gov to check your loan status in your dashboard.
If you don’t take action, the government can take eligible federal payments — including your tax refund — and apply the funds to your defaulted loan balance. Joint filers can be affected, and your entire refund may be offset to pay for defaulted federal student loans, even if the other spouse doesn’t owe the debt. The spouse without the debt can file for injured spouse relief to try to recover their part of the refund.
After the refund is seized, you’ll receive a letter explaining where the funds were applied to reduce your loan balance. This payment doesn’t automatically remove the loan from default, and future tax refunds may be offset until your default status is resolved.
Tax refunds are treated differently from wages. With wage garnishment, the government orders your employer to withhold up to 15% of your disposable pay, rather than the 100% that can be taken from your tax refund.
How To Stop a Tax Refund Offset
Your tax refund isn’t automatically gone as soon as you receive a notice of intent to offset. You have 65 days from the date on the notice to stop it. To do so, you have to return your loan to good standing, but there are a few ways to achieve that.
Your options for avoiding tax refund seizure include:
— Enter into a repayment agreement and make your first payment.
— Start a nine-month loan rehabilitation agreement and make your first payment.
— Consolidate your defaulted federal student loan into a Direct Consolidation Loan.
— Pay your debt in full.
— Submit a valid objection that you don’t owe the debt, you aren’t behind on payments, you’re currently in bankruptcy, or you are totally and permanently disabled.
Timing is key, as you must return the loan to good standing before the offset begins.
“Rehabilitation is often more affordable than offset or garnishment,” says Burckart. “It’s important to proactively gain control of your student loan repayment to put yourself in the best financial position.”
Why Student Loan Tax Refund Offsets Matter Now
The Treasury Offset Program isn’t new, and the government has had the ability to seize tax refunds for defaulted student loans. But many federal student loan borrowers may be at or near default as pandemic-era protections have ended and repayment plans have changed.
Federal student loan borrowers who were in payment pauses, forbearance or other temporary relief programs may have moved into delinquency or default as those measures have wound down.
However, the U.S. Department of Education announced a temporary pause on involuntary collections, including the Treasury Offset Program, for defaulted student loans. The pause is in place as it implements repayment reforms and is expected to remain in effect until July 2026.
With the involuntary collection pause in place, student loan borrowers in default have time to return loans to good standing and out of default. “Don’t wait until you’re struggling with treasury offset or wage garnishment, especially if you’re counting on those funds,” says Burckart.
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When the Government Can Take Your Tax Refund to Pay Your Student Loan originally appeared on usnews.com
