If You Owe Student Loans, Can They Take Your Tax Refund?

Student loan debt can have serious financial consequences, particularly if payments are missed. One major concern for borrowers is whether their tax refund can be taken to cover unpaid student loans. A tax refund offset allows the government to seize refunds from those who owe certain types of federal student loans.

Understanding how this process works can help borrowers plan ahead and potentially avoid losing money during tax season.

Default Status and Federal Offsets

Falling behind on student loan payments can lead to significant consequences, especially if the loan enters default. For federal student loans, default typically occurs after 270 days of missed payments. At that point, the entire balance becomes due, and the government can recover the debt in several ways, including tax refund offsets.

The Treasury Offset Program (TOP) intercepts tax refunds to cover delinquent federal debts. When a borrower defaults, the Department of Education refers the debt to TOP, which matches it against tax records. If a refund is available, the government can seize it without a court order.

Before an offset occurs, borrowers receive a notice explaining the debt and their rights, including the opportunity to challenge the offset if they believe the debt is incorrect or if they qualify for an exemption, such as financial hardship. Disputing an offset requires quick action, as strict deadlines apply for submitting documentation.

Types of Federal Student Loans Subject to Offsets

Only defaulted federal student loans are subject to tax refund offsets. The type of loan determines how the offset process works.

Federal Direct Loans

Federal Direct Loans, including Direct Subsidized, Direct Unsubsidized, Direct PLUS, and Direct Consolidation Loans, are issued by the U.S. Department of Education. If a borrower defaults, the Department can refer the debt to TOP for collection.

The government can seize tax refunds each year until the debt is repaid or removed from default through rehabilitation or consolidation. Borrowers receiving an offset notice have the right to request a review of their debt but must act quickly to dispute errors or claim financial hardship.

FFEL Program Loans

The Federal Family Education Loan (FFEL) Program, discontinued in 2010, included Subsidized and Unsubsidized Stafford Loans, PLUS Loans, and Consolidation Loans. These loans were originally issued by private lenders but guaranteed by the federal government. If a borrower defaults, the guaranty agency that insured the loan pays the lender and then attempts to collect the debt.

If the guaranty agency is unsuccessful, it can refer the defaulted loan to the Department of Education, which may then initiate a tax refund offset. Guaranty agencies may also impose collection fees, increasing the total amount owed. Some agencies offer loan rehabilitation programs that allow borrowers to remove their loans from default and stop future offsets, but this requires making a series of on-time payments.

Perkins Loans

Perkins Loans were low-interest federal loans for students with exceptional financial need, but the program ended in 2017. These loans were issued directly by colleges and universities, making the school responsible for collecting payments. If a borrower defaults, the institution may attempt to recover the debt before referring it to the Department of Education for collection.

Once a Perkins Loan is in default and transferred to the Department, it becomes subject to tax refund offsets. Unlike Direct and FFEL loans, Perkins Loans may also be subject to additional collection efforts by the school, such as wage garnishment or legal action. Borrowers seeking to avoid an offset should contact their school or loan servicer to explore repayment options, including loan rehabilitation.

Changes to Filing Status

Filing taxes as a married couple can impact whether a tax refund offset occurs, particularly when one spouse has defaulted student loans while the other does not. The IRS processes joint tax returns as a single entity, meaning any refund belongs to both spouses collectively. If one partner owes a federal debt subject to offset, the entire refund may be seized, even if the other spouse has no connection to the debt.

To mitigate this, the spouse not responsible for the debt can file an Injured Spouse Allocation (Form 8379). This form allows them to claim their portion of the refund by demonstrating their separate income, tax payments, and credits. If approved, the IRS will release the unaffected spouse’s share while applying only the debtor’s portion toward the outstanding loan. However, this process can take several months, delaying access to the refund.

Filing separately can prevent a spouse’s refund from being seized, but it often results in higher tax liability due to the loss of benefits like the Earned Income Tax Credit (EITC) and student loan interest deductions. Weighing the financial trade-offs is important, as the increased tax burden from filing separately may outweigh the benefit of protecting a refund.

Potential Remaining Liabilities

Losing a tax refund due to a student loan offset does not necessarily eliminate the debt, as interest and collection fees continue to accumulate. The Department of Education and its contracted collection agencies often impose additional charges that can significantly increase the total amount owed. Administrative fees, which may exceed 20% of the collected amount, are deducted before any payment is applied to the loan balance.

Beyond tax refunds, other federal payments can also be intercepted to satisfy defaulted student loans. Social Security benefits, including retirement and disability payments, may be garnished under the Treasury Offset Program, subject to certain limits. Federal law prohibits garnishment that reduces Social Security payments below $750 per month, but any amount above this threshold remains vulnerable. Wage garnishment is another risk, allowing the government to withhold up to 15% of disposable income without requiring a court order.