How to Stop Student Loan Tax Garnishment

Millions of Americans struggle to make their monthly student loan payments and eventually default on their loans. When this happens, the Department of Education can garnish their wages, Social Security benefits, and federal tax refunds to repay the defaulted debt.

But how does this process work? And when can the government garnish your tax refund to repay your student loans? In this blog post, I’ll answer these questions and give tips on protecting your tax refund from garnishment to repay student loan debt.

Related: Student Loan Tax Offset Suspended

Private lenders can’t take your tax refund for defaulted private student loans. But they may garnish your wages, put a lien on your home, and take money from your bank account if they sue you and get a judgment. Read more about what happens when you default on private student loans.

The IRS can garnish, or offset, your wages only after you fall behind on federal student loans and default. When that happens, your loan holder will send your account to the Default Resolution Group or a debt collection agency. Once there, the company will notify the Treasury Offset Program, which will mark your tax refund for garnishment until you get out of default or the balance is paid in full.

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:

• Apply for consolidation.

• Enter into the student loan rehabilitation program.

• Ask for hardship relief.

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.

The IRS won’t be taking your tax refund in 2022 to repay delinquent student loans. In the midst of the coronavirus pandemic, the House gave Americans a break by halting all collection activities for defaulted federal student loans — including wage garnishment and the seizure of tax refunds and Social Security payments. As inflation continues to tighten its grip on the nation’s economy, this ‘free pass’ for defaults has helped struggling borrowers keep some extra cash in their pockets.

Related: How Student Loan Default Affects Your Credit Score

The tax refund you receive in 2023 will not be garnished for unpaid student loans. The payment pause has been extended until next summer by the Biden administration. According to the US Department of Education, collections through the Treasury Offset Program will be halted for at least six months after the forbearance ends. Given that buffer, the department may delay garnishing tax return money for defaulted student loans until 2024.

This relief covers both Ed-owned student loans and privately-held federal student loans like FFEL and Perkins Loans.

Related: Are FFEL Loans Eligible for Forgiveness

The White House has paused collection activity for defaulted federal student loan debt until the end of 2023, so you’ll get your refund back this year. While you may be tempted to hold off on tackling your student loans hoping that President Biden will wipe out your loan balance, I wouldn’t hold my breath. Instead, I’d use the federal student loan payment pause to get my loans back in good standing. That way, I’d regain eligibility for more favorable repayment terms and forgiveness programs.

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