How to protect your tax refund from student loan tax garnishment

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The government can withhold your federal tax refund if you’ve defaulted on your federal student loans. Learn how to stop student loan tax garnishment. (Shutterstock)

If you default on your federal student loans, you can run into some financial issues when it’s time to pay your taxes. Your loan holder can withhold some or all of your federal income tax refund to pay your student loan debt, also known as tax garnishment. Before you file your taxes, it’s important to deal with your loans that are in default.

Here’s some additional insight into what student loan tax garnishment is, how it works, and how to stop student loan tax garnishment.

If you’re thinking about refinancing your student loans to avoid going into default, visit Credible to learn more about student loan refinancing and to see your prequalified rates from private student loan lenders.

What is student loan tax garnishment?

If you have federal student loans in default, your loan holder can garnish your federal tax refund. This means that when you file your taxes, the federal government can take your refund and apply it toward your federal student loan debt. 

Private student loan lenders can’t garnish your tax refund. But if you default on your private loans, the lender can garnish your wages if it sues you in court and receives a judgment. 

Under federal law surrounding the collection of debts, the Department of Education can request that the U.S. Department of the Treasury withhold money from your federal or state income tax refunds, as well as Social Security payments and other federal payments. This tax refund withholding is referred to as a Treasury offset.

Before a Treasury offset can begin, the Bureau of the Fiscal Service must send a notice of intent to offset letter to you 65 days before the offset is scheduled. While you may receive only one notice, the tax garnishment will continue until you’re no longer in default or pay off your federal student loan debt. 

Tax refunds during COVID-19

To help provide relief during the COVID-19 pandemic, the federal government paused student loan payments and collections on federal student loans in default through Aug. 31, 2022. 

The government also won’t withhold income tax refunds on eligible federal student loans in default. If you have these types of federal student loans in default, they’re eligible for COVID-19 emergency relief:

  • Direct Loans
  • Federal Family Education Loan (FFEL) Program loans
  • Federal Perkins Loans held by the Department of Education
  • HEAL loans

Treasury offsets will remain paused for six months after the student loan payment pause ends as part of continued COVID-19 financial relief efforts. This means if your loans are eligible, you won’t have money withheld from your tax refund during that time.

How to prevent student loan tax garnishment

If you want to prevent student loan tax garnishment, here are a few options that can help you avoid defaulting or get out of loan default: 

  • Federal consolidation — If you’ve defaulted on a federal student loan, you can consolidate all your federal student loan debt into one Direct Consolidation Loan. After consolidation, you’ll have only one new loan to repay. You’ll need to agree to repay the new Direct Consolidation Loan under an income-driven repayment plan, or you can make three consecutive, in-full monthly payments on the defaulted loan before consolidating it if you want to be considered out of default. With federal student loan consolidation, your interest rate will be a weighted average of the interest rates on your existing loans, so your new rate may or may not be lower.
  • Deferment or forbearance — Either option can give you more time to gain your financial footing by letting you temporarily postpone your federal student loan payments. Unfortunately, interest will continue to accrue in most cases.
  • Loan rehabilitation — Rehabilitation can help you get out of default, but it might not stop wage or tax garnishment until the rehab process is complete.
  • Income-driven repayment (IDR) plan — Signing up for an IDR plan takes your income and family size into account to set a monthly payment amount that’s reasonable for you to manage, which can help you avoid default. You’ll have to recertify your income and monthly payments each year, so it can be hard to predict what your monthly payments will be for the remaining life of your loan.
  • Federal student loan forgiveness — If you qualify for federal student loan forgiveness, you may no longer owe any money on your loans (some forgiveness programs only forgive partial loan amounts) and you won’t have to worry about a student loan tax offset occuring. If your student loans are already in default, you’ll need to resolve the default before your loans can be eligible for loan forgiveness.
  • Private student loan refinancing — Switching to a private lender could help you replace your old loan with a new one, ideally with a lower interest rate or smaller monthly payments. Refinancing usually requires good to excellent credit, so it could be hard to qualify if you have defaulted loans, but applying with a cosigner might help. And think carefully before refinancing federal student loans into a private one: You’ll lose access to federal protections like deferment, forbearance, and IDR plans.

Credible lets you easily compare student loan refinance rates from various lenders, and it won’t affect your credit.

When will student loan default cause your tax refund to be garnished? 

Tax refund garnishment notifications (known as Intent to Offset Federal Payments) are sent 60 days before the garnishment is set to occur, so you’ll have some warning before the garnishment begins. 

This notice should come from the Treasury Offset Program and will give you several immediate options:

  • Pay the debt.
  • Dispute the debt.
  • Make a payment plan.
  • Request a review of the debt.

This notice will also outline the type of debt and the amount owed.

When your tax refund can’t be garnished

Here are a few examples of when the government might not be able to garnish your income tax refund: 

  • Your school closes. If the school you took out federal student loans to attend closes while you’re enrolled or soon after you withdraw, you may be eligible to have your federal student loans discharged. Once your loans are discharged, you’re no longer required to repay your federal student loans and therefore can’t be in default or have your tax refund garnished.
  • You file for bankruptcy. Filing for bankruptcy can remove your student loans from default. If you recently filed for bankruptcy or are about to file for bankruptcy, find out whether or not your federal student loan debt qualifies for default any longer.
  • You experience a total and permanent disability. Federal student loans can be discharged — and as a result not go into default — if you experience a total and permanent disability.

What happens if you think you received a tax offset notice in error? 

If you receive a tax offset notice, it’s important to review your student loan status for potential errors. 

If you believe that you’re current on the debt, you can mail evidence that supports your claim to the Department of Education. If you’ve fully paid off your debt, you can call the phone number listed on the Intent to Offset Federal Payments notice that you received.

If you’ve already experienced a student loan tax offset, you can take steps to attempt to receive a refund on your garnished return.  

If a student loan refinance is right for you, visit Credible to compare private student loan refinance rates from various lenders in minutes.