Normally, the federal government can garnish your federal income tax refund when you default to cover what you owe. But President Biden has paused this program and other collection activities while lawsuits filed against his cancellation plan work their way through the courts.
The best way to stop federal loans from taking your refund is to get out of default before filing your tax return. Before the pandemic, there were three ways to do that:
Student loan consolidation gets you out of default by combining your loans into a single loan through the Direct Consolidation Loan Program. The new loan is eligible for income-driven repayment plans and student loan forgiveness programs like the IDR Waiver. It also clears your name from CAIVRS so you can qualify for a federally-backed mortgage.
Rehabilitation returns your loans to good standing after you make nine on-time payments within a ten-month period. It also removes the default status from your credit report. The past-due payments will remain no matter which option you go with.
The department can also hold off on taking your tax refund if you send them evidence that you’re facing extreme financial hardship, like your home was recently foreclosed or your personal finances have been wrecked by prolonged unemployment.
Related: Student Loan Consolidation vs Rehabilitation
Last year, the Education Department introduced a fourth option: The Fresh Start Program.
Under this initiative, the department is allowing borrowers to recover from student loan default simply by agreeing to make monthly payments under a long-term payment plan. Read more about the Fresh Start student loan program.