How to Avoid a Student Loan Tax Refund Offset

When your student loans go into default, there are several potential consequences, ranging from an impact on your credit score to a tax refund offset on student loans. 

Having a tax refund offset on your student loans could result in less money than expected during tax season, setting you back on your financial goals. Before you end up with a student loan default tax garnishment, here’s what you need to know.

Will student loans take my tax refund in 2021?

First, it’s important to note that, due to the COVID-19 pandemic, the government has halted tax refund garnishment on student loans dating retroactively from March 13, 2020. This action remains in effect until January 31, 2022. If you have experienced a tax refund offset related to your student loans since then, you should reach out to the Treasury Offset Program to see if you’re eligible to have some of that money returned.

Under normal circumstances, your tax refund can be garnished to pay student loans in default. This is a process known as garnishment. In short, if your student loan is in default, the Treasury Department has a way of matching that up with your expected tax refund after you submit your tax return.

Money from your tax refund is directed toward your student loan debt, which is in default. As part of the process, you’ll receive a notice that your tax refund offset is coming. 

Pay attention to notices

Before your tax refund is garnished to pay student loans, you’re likely to receive a notice in the mail. Additionally, you’re usually notified when your student loans go into default. Pay attention to notices since they can provide you with vital information to help you avoid having defaulted student loans taken from a tax refund.

Once you receive your notice, make sure to review your student loan records. You should be able to verify whether you’re in default. If there’s a mistake, you can challenge the tax refund offset and have the process stopped before your tax refund is garnished. Additionally, if you have an agreement with the Department of Education to rehabilitate your loans and you’re making the payments, you should be able to halt the garnishment.

The steps you can take to freeze or reverse the process of defaulted student loans being taken from a tax refund include:

• Request your loan file within 20 days of receiving the notice so you can review the student loans and see your status.
• Using the information in your loan file, request a review (the form is available from your servicer) of the tax refund offset within 15 days of receiving your loan file.

There’s no guarantee that this will stop the process, but it can be one way to slow things down and give you time to improve your situation.

How to avoid a student loan tax refund offset in the first place

If you want defaulted student loans not to be taken from your tax refund, avoiding default can be one way to keep from worrying about student loan tax refund garnishment. 

You can avoid default by making your payments on time and in full. Additionally, if you’re experiencing financial hardship, find out your options to make your payments more manageable. Rather than ignoring the problem, it’s essential to confront it head-on and do your best to find solutions.

Some of the ways to keep out of default include:

• Income-driven repayment. You might be eligible for an income-driven repayment (IDR) plan if you have federal student loans. These four different programs base your monthly payments on your discretionary income. This can even include setting your payment to $0 per month. When on income-driven repayment, as long as you make your new monthly payment on time and in full, you won’t have to worry about default.

• Consolidation. Federal Direct Loans can be consolidated, resulting in a longer repayment term if the balance is high enough. A longer repayment term can lead to a lower, more manageable monthly payment. However, it’s important to note that you could end up paying more overall because of the way interest accrues over time.

• Refinancing. You can also refinance your student loans to a private lender. If you have good credit or a credit-worthy cosigner, you could potentially refinance your loans to a lower rate to save on interest costs over time. Once you refinance, though, keep in mind that you’ll lose access to federal programs like income-driven repayment and loan forgiveness. 

• Deferment or forbearance. In hardship situations, you can also ask for student loan deferment or forbearance. These options allow you to put off making payments for a time. It keeps you out of default and prevents having your tax refund garnished to pay student loans. However, interest might still accrue, and you could lengthen the time you’re in debt and see a growing balance.

Carefully consider your options before moving forward, and choose a path that’s most likely to provide you the relief you need while keeping you out of default — and keeping your tax refund intact. Later, if you decide it makes sense for your situation, you can use some of your tax refund amount to make a student loan payment.

Bottom line

Defaulted student loans can be taken from your tax refund. If you’ve fallen into default, it’s essential to pay attention to tax notices. Additionally, contact your servicer or the Department of Education to work on rehabilitating your student loans and getting them out of default. Finally, if you are experiencing a student loan tax refund offset, contact the Treasury Offset Program to find out if there’s a way to freeze the offset and keep your tax refund intact.

There are tools and programs available to help you avoid student loan default, so review your options to avoid ending up in the position of default and tax refund garnishment.