Can I Lose My Tax Refund if I Default on Student Loans?

Can the IRS Take Your Tax Refund for Student Loan Repayment if You Default on Your Loans?

Yes, the federal government has the power to keep your tax refund to repay your federal debt. If you default on your federal student loans (repeatedly miss payments), you are susceptible to garnishment. 

The federal government can do this because federal student loans are backed by the federal government. That’s why tax refunds are considered fair game for garnishment. What loans are considered federal loans? All Direct Loans, Direct Consolidation Loans, Federal Family Educations Loans (FFEL), and federal Perkins Loans. 

Private student loans are not considered federal debt since they are granted and backed by private lenders. 

How Does a Tax Refund Garnishment Happen?

There are several government departments involved in the process of tax garnishment, including the IRS. The IRS processes your federal tax returns, and the Bureau of Fiscal Services and the Treasury Offset Program process notices and collections. These departments (bureaus) both fall under the Department of Treasury.

Two primary laws that permit the IRS to take your tax refund for student loans are:

• Title 26 of the United States Codes (laws for the Internal Revenue Service) 

• Title 31 of the United States Codes (regulations for money and finance)

These laws require agencies like the U.S. Department of Education to notify the Treasury Offset Program of past-due debt. Your Social Security number will be matched to the reported federal student loan debt before a tax refund offset is put into motion. 

What Is a Tax Refund Offset?

When your tax refund is garnished, it’s called a treasury offset or tax offset. Only federal and state agencies can garnish your tax refund through the Treasury Offset Program (TOP). The TOP is run by the U.S. Department of Treasury’s Financial Management Service (FMS) to help manage tax garnishments. 

TOP is also a part of the Bureau of the Fiscal Service’s Debt Management Services (DMS), which manages databases and collection services for federal debt. DMS is a service agency that sends tax return money to collection agencies for student loan debt. You’ll see these names on some notices. 

When Can the Government Garnish My Tax Return for Student Loan Debt?

If you’ve defaulted on a federal student loan, you’re at risk of a tax return garnishment. Default isn’t the same thing as delinquency. If you’ve just missed one or two payments, your account is considered delinquent. But you aren’t in default until you’ve missed nine months of federal student loan payments. 

Nine months is a generous timeline compared to the default process for many private student loans. Private student loans can enter default after only one or two missed payments. Your individual loan agreement will define what’s considered default. If you aren’t sure about your default timeline and you’re worried about missing payments, contact your lender.

By contrast, federal student loans won’t go into default status until after nine months (270 days) of missed student loan payments. That said, federal agencies are required to notify TOP if a federal loan borrower hasn’t made a payment in 120 days. 

The agency managing your debt must send you a letter before it can garnish your tax refund. The letter will tell you that the collector plans to take your money from a federal payment, and it will also include:

• The reason for your debt

• The amount you owe

• Your rights to review information about your debt

• The arrangements you can make to pay off your debt

After you receive a notice from your lender (or collection agency), then you’ll receive a notice from the Treasury Offset Program. 

How Do I Know if My Tax Refund Has Been Taken To Pay My Student Loan Debt?

Federal student loan garnishments don’t have to go through the courts, so you won’t be receiving a summons. The Department of Education uses a special administrative process to fast-track garnishments without using the courts. The Treasury Offset Program (TOP) will send you a notice 60 days before your tax return is set to be garnished. With this notice, you’ll have an explanation of some of your rights. 

The notice will tell you that you have the right to take the following actions before your tax return is garnished:

• Dispute the debt

• Request copies of agency records

• Request an administrative review of your total debt amount

• Make an acceptable repayment plan

You can call 1-800-304-3107 to reach the TOP Interactive Voice Response (IVR) system to learn who you need to contact about your tax offset debt. 

How Do I Dispute My Student Loan Debt?

Disputing a debt will take some time and effort, but it’ll be worth it if you can stop your student loan tax garnishment. First, gather your records and compare the debt amount and repayments to those on your credit report and to your payment history and account information on your student loan servicer’s website.

You can get a free copy of your credit report once a year from each of the three major credit bureaus — Experian, Equifax, and TransUnion. You must put in a separate request for each credit reporting bureau. Once you get the report, compare the information to your financial records. Compare your credit history report to what the tax offset notice says and what your lender reports. 

Be sure to check your name and address information to make sure there aren’t any name mix-ups such as typos or records of relatives. You should also check your credit reports for mismatches due to identity fraud. 

Organize and summarize any errors and put them in writing. Lay out the basic facts. Notify your lenders and loan servicers of any errors in the credit reporting of your student loan, preferably in writing. The Federal Student Aid Department of the U.S. Department of Education has a Default Resolution Group (DRG) number you can call at 1-800-621-3115. Be sure to report errors to each credit bureau as well. 

If your tax return is already being held back by the IRS, you can appeal the decision. 

How Do I Stop Student Loans From Taking My Tax Refund?

There are several ways to stop your tax return from being garnished. You can:

• Dispute your student debt

• Claim certain hardships

• Rehabilitate your loan

• Look into student loan repayment plans

• File for bankruptcy

How Do I Dispute My Tax Refund Garnishment? 

If you dispute the debt and a hearing is held, your taxes won’t be garnished until after your disputed claim is reviewed. You will need to contact your loan servicer and state your case. If your tax money is being garnished due to your spouse’s debt, you can file an injured spouse form to receive your portion of the tax return.

What Hardships Can I Claim to Stop a Tax Refund Garnishment?

The IRS will consider some hardships, including:

• Permanent and provable disability

• Extreme financial hardship

• Exhausted unemployment earnings

• Homelessness

You can apply for a tax offset hardship refund through the Treasury Offset Program. 

How Do I Rehabilitate My Student Loans?

The Department of Education offers loan holders a one-time opportunity to rehabilitate a student loan after the loan has entered default. You can use this option to stop the IRS from keeping your tax refund money. It will also help you if you want to go back to school and need federal student aid.

To rehabilitate a student loan, contact your lender and tell them you would like to start the loan rehabilitation process. Your income and expenses will be reviewed to arrange a monthly payment plan. You must make at least nine out of 10 payments from the new payment plan on time and in full. Once you make your fifth payment, the garnishment order must be suspended. 

What Student Loan Repayment Plans Are Available? 

There are four main types of student loan repayment plans. To figure out which one fits you best, consider your annual income, how much debt you have, your family size, and your personal finances.

Here’s a brief overview of the main repayment plans:

• Standard Repayment Plan: The default plan with a 10-year repayment period that borrowers are automatically enrolled in unless they choose a different plan

• Income-driven repayment plans: IDR plans are based on the borrower’s income and family size; there are four main programs:

  • Income-Based Repayment (IBR) 

  • Income-Contingent Repayment (ICR) 

  • Pay As You Earn (PAYE)

  • Saving on a Valuable Education (SAVE)

    • Formerly the Revised Pay As You Earn (REPAYE) plan

• Graduated Repayment Plan: Payments increase every two years of the loan’s 10-year repayment period

• Extended Repayment Plan: Payments increase every two years of the loan’s 25-year repayment period

What if None of These Repayment Plans Are Right for Me?

If none of the above repayment plans are right for your situation, you still have other options to help you get on top of your finances to prevent a tax refund.

Here are a few other paths to consider:

• Look into student loan forgiveness programs like the Public Service Loan Forgiveness (PSLF) program.

• Apply for Direct Loan Consolidation.

• Consider refinancing your student loans.

• Apply for forbearance or deferment. 

Can I Really File Bankruptcy To Prevent a Garnishment? 

The short answer: Yes, you can file bankruptcy to help with your student loan debt and prevent a tax refund garnishment. To get a student loan discharge through bankruptcy, you must meet certain eligibility requirements, which are outlined in the Brunner test guidelines. 

Student loans can be hard to manage, and the complication of a student loan default adds more stress. If you’ve tried the recommendations above and none have worked, use our free, five-minute screener to see if you’re eligible to file bankruptcy to clear your federal student loans. 

The stigma around filing bankruptcy prevents many people from filing, but we want to assure you that there is no shame in using this legal tool, which was designed to give individuals a fresh start. Upsolve has already helped thousands of people discharge over $600 million through bankruptcy since we began in 2017.