Will Your Refund Be Taken for Student Loans? [2023 Tax Season]

#1 Student loan lawyer

Updated on July 10, 2023

Will your tax refund be taken for student loans in 2023? Can it be seized? The simple answer is no, for this year at least.

Thanks to a policy change by President Biden’s administration in response to COVID-19, the IRS will pause collections for all federal student loan borrowers through the Treasury offset until six months after the payment pause ended on June 30, 2023.

This means if your federal student loans are in default, neither your wages nor your 2022 tax return will be garnished as long as you file on time.

Ahead, we’ll review the implications of this policy for this tax year.

Related: How to Stop Student Loan Tax Garnishment

Why Does an IRS Tax Refund Offset Happen?

Tax refund offsets come into play when you owe debts to state or federal agencies. These agencies leverage the Treasury Offset Program to withhold your tax refund, repurposing it to offset these outstanding debts. The initiation of this process begins when an agency reports your debt to the TOP, prompting the IRS to repurpose your refund to fulfill obligations such as

  • Overdue child support.

  • Defaulted federal student loans.

  • Unsettled federal and state income taxes.

  • Unpaid unemployment compensation debts.

In the past, the IRS even had the authority to seize your child tax credit to recuperate funds for student loans. But a recent announcement by Education Secretary Miguel Cardona ensured that the department would no longer seize child-tax credits for borrowers in default, even post-payment pause.

Please note child support offsets are a state matter, not a federal one. The process initiates when the state where the child support order was set files a claim with the Bureau of the Fiscal Service. This action enrolls you in the Treasury Offset Program, with the offsetting continuing until your child support obligations are met.

Can the IRS Garnish Your Wages for Student Loans?

While the IRS does not garnish student loan wages, the U.S. Department of Education can. If you default on your federal student loans, the Department of Education can order your employer to withhold a portion of your wages and use it to pay back the loan. This is known as wage garnishment. But the IRS is responsible for garnishing tax refunds, a process called a tax refund offset, to cover defaulted student loans.

Related: Garnishment of Tax Refund for Student Loans

Which Student Loans Can Garnish Your Tax Refund?

Not all student loans can tap into your tax refund. Only defaulted federal student loans have this power. If you’re in deferment, forbearance, or active repayment, your tax refund remains secure from student loan garnishment.

The list of loans that can instigate a student loan tax refund offset includes:

  • Direct Loans.

  • Direct Consolidation Loans.

  • Loans from the Federal Family Education Loan Program (FFELP).

  • Federal Perkins Loans.

Defaulted private student loans don’t have the same clout unless given authority by state law. They can’t lay claim to your tax refund, maintaining your control over these funds.

Related: Can Social Security Be Garnished for Student Loans?

How Are Student Loan Tax Refund Offset Policies Shaping Up for 2023?

In response to the COVID-19 pandemic, the government has paused all collections through the Treasury Offset Program until June 30, 2023. This means, as a taxpayer, the IRS won’t seize your 2023 federal income tax refund for a student loan offset.

Screenshot of FAQ page from StudentAid.gov about postponing tax refund offsets.

If you have defaulted on federal student loans, your 2022 tax refund is safe, provided you file your taxes promptly.

The U.S. Department of Education extends this pause on tax refund offsets for six months beyond the payment suspension period.

Moreover, if your loans fall under the Fresh Start Student Loan Program, all collections will be halted until a year after the payment suspension. As a bonus, the program will restore your eligibility for student loan repayment plans and loan discharge programs and remove the default status from your credit report, thereby possibly improving your credit score.

If your tax refund has been offset for student loans since the pandemic began, you might recover some funds by reaching out to the Treasury Offset Program.

Can You Deduct Wage Garnishment for Student Loans from Your Taxes?

A key question when dealing with wage garnishment for student loans is: “How to claim student loan garnishment on taxes?”

Here’s the straight answer: Wage garnishment for student loans isn’t tax-deductible. You can’t claim the garnished amount as a tax deduction or a tax credit.

Tax Deduction for Student Loan Interest

But there’s a silver lining:

  • The interest paid on a qualified student loan is tax-deductible, even if it’s repaid through wage garnishment.

  • The IRS allows you to deduct up to $2,500 of this interest from your taxable income each year.

Understanding Wage Garnishment

To avoid wage garnishment, it’s important to understand what it is and when it happens:

  • Wage garnishment occurs when you default on your student loans and fail to make payments for nine months.

  • The federal government can legally garnish up to 15% of your paycheck and all your tax refunds to pay down your student loans. Private lenders and collection agencies may be able to garnish more depending on state law.

Related: How to Stop Student Loan Wage Garnishment?

Avoiding Wage Garnishment

If you’re struggling with federal student loan payments, it’s time to act:

  • Explore solutions like negotiating repayment plans or seeking deferments.

  • Understand the tax implications of wage garnishment and how to prevent it.

How Does Student Loan Debt Impact S Corporation Owners?

Student loan debt can cast a long shadow over S Corp owners. This impact becomes especially pronounced for wage garnishment.

Wage Garnishment for S Corp Owners

If you’re an S Corp owner who also happens to be an employee of the corporation, here’s what you need to know:

  • If you’ve defaulted on your federal student loans, the loan holder can instruct your S Corp to withhold up to 15% of your wages. This is known as administrative wage garnishment and doesn’t require a court order.

  • The garnishment continues until the defaulted loan is paid in full or until you’re removed from default.

Limitations on Using S Corps to Pay Off Student Loans

On the flip side, you can’t use your S Corp to pay off your personal student loans.

Here’s why.

According to Section 127 of the Internal Revenue Code (IRC), business owners or shareholders can’t benefit more than 5% of the total amount paid to employees as education assistance for student loan payments. This provision ensures that the benefit is primarily for employees, not owners.

Navigating Wage Garnishment as an S Corp Owner

As an S Corp owner, understanding the implications of wage garnishment is vital. Some strategies to manage your student loans effectively include:

  • Discussing income-driven repayment plans,

  • Exploring deferments and forbearances.

  • Qualifying for student loan forgiveness programs.

  • Seeking professional advice to prevent wage garnishment.

Related: How to Get Student Loans Out of Default Fast

What Should You Do If the IRS Garnishes Your Wages or Seizes Your Tax Refund for Student Loans?

Facing wage garnishment or tax refund offset due to defaulted student loans can be stressful. Here are six actionable steps to navigate this situation:

  1. Step 1: Understand the Reason for Garnishment or Offset. Is it due to defaulted federal student loans? Federal student loans enter default after 270 days of missed monthly payments. In contrast, private student loans require a court judgment before wages or your bank account can be garnished.

  2. Step 2: Confirm Your Loan Status. Ensure your student loans are indeed in default by checking with your loan servicer.

  3. Step 3: Dispute the Garnishment or Offset if Incorrect. If you believe the garnishment or offset is wrong, you can dispute it. For wage garnishment, request a hearing in writing within 30 days of receiving your collection notice. For tax refund offset, consider applying for a student loan tax offset hardship refund. Note: Not getting an offset notice before getting a student loan tax garnishment is typically insufficient to stop the IRS from taking your refund.

  4. Step 4: Contact Your Student Loan Servicer. It’s crucial to discuss your situation with your loan servicer. They can help you explore options to get out of student loan default, including loan rehabilitation, loan consolidation, or setting up a repayment plan.

  5. Step 5: Seek Professional Help if Needed. If the situation seems overwhelming, consider seeking assistance from a student loan lawyer. They can help you understand your rights and navigate the process.

  6. Step 6: Prevent Future Garnishments or Offsets. To avoid future financial distress, staying current on your student loan payments is essential. Consider options like payment plans based on your family size and adjusted gross income.

Can Your Spouse’s Tax Refund Be Garnished Because of Your Student Loans?

If you’re married and wondering whether your student loans can affect your spouse’s tax refund, the answer is yes – but only in some cases. Here’s how it breaks down:

  • Filing Taxes Jointly: If you file your taxes jointly and have defaulted on your federal student loans, the IRS can garnish the entire tax refund, irrespective of whether your spouse has student loan debt or not. To protect your spouse’s refund, consider filing taxes separately.

  • Filing Taxes Separately: This action will protect your spouse’s federal tax refund from being seized for your defaulted student loans. But beware – it may disqualify you from certain tax benefits, such as the student loan interest deduction and education credits. It’s worth weighing these pros and cons before deciding how to file.

  • Injured Spouse Allocation: Suppose you have already filed your taxes jointly, and your spouse’s tax refund was taken due to your student loans. In that case, your spouse can file Form 8379, the Injured Spouse Allocation. This form allows your spouse to request their portion of the refund amount. It can be filed with your original joint tax return, an amended joint tax return, or separately after you have filed your tax return.

Related: Is Spouse Responsible for Student Loans Incurred Before Marriage?

Bottom Line

Navigating wage garnishment or tax refund seizure for student loans in 2023 requires understanding your rights and options.

From knowing tax implications to managing S Corp situations, effective loan management is crucial.

In light of current policies, wage garnishment for student loans isn’t tax-deductible, but interest paid is. Be proactive to avoid wage garnishment and utilize relief options available due to the pandemic.

Need a personalized student loan strategy? Don’t hesitate. Book a call with our team today.

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Will the IRS take my refund if my wages are being garnished?

Under normal circumstances, the IRS can seize your tax refund if your wages are being garnished due to defaulted federal student loans. Collections are temporarily paused via the Treasury Offset Program until June 30, 2023. Therefore, if your wages are garnished for student loans in 2023, your tax refund will not be taken, provided you file your tax return on time.

Will student loans be taken out of tax return?

Typically, the IRS can use a “tax offset” process to deduct student loans from your tax return if your federal student loans are in default. But because of the ongoing response to the COVID-19 pandemic, there’s a pause on collections through the Treasury Offset Program until June 30, 2023. This means, in 2023, your student loans will not be deducted from your tax return, provided you file your return on time.

Is the student loan offset suspended in 2023?

Yes, the student loan offset is suspended in 2023. Because of policy changes in response to the COVID-19 pandemic, there is a pause on collections via the Treasury Offset Program until June 30, 2023. As a result, the IRS will not offset your tax refund to pay defaulted federal student loans if you file your tax return on time in 2023.