Will student loans take my tax refund?

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If your federal student loans are in default status, typically your tax refund can be taken to make up the difference. That wasn’t the case for the 2020 tax season, since the government’s student loan payment pause also instated a moratorium on collections activities for federal student loans. However, with the moratorium set to expire on Jan. 31, 2022, it’s best to plan ahead to ensure that your loans stay out of default for the 2021 tax season.

How has COVID-19 affected 2020 tax refunds?

Due to the financial impact of COVID-19, the federal government rolled out several relief measures, including stimulus checks, eviction moratoriums and administrative forbearance for federal student loans. The tax deadline was also extended, with the 2020 tax season ending on May 17, 2021.

Normally, if your student loans are in default status, your tax return will be seized to cover some of the defaulted balance. However, in 2020, the federal government halted all student loans collections, which means that tax returns weren’t offset.

This was a conditional relief measure; when filing your 2021 taxes, this will likely not apply. Collections activities will resume once the payment pause ends on Jan. 31. 2022.

How to avoid tax refunds from being taken in the future

If you’ve failed to make payments on your federal student loans for nine months (or 270 days), your student loans are considered to have entered into default status by the U.S. Department of Education. If you default, your federal student loans could also enter into collections. When this happens, your federal income tax could be garnished by the U.S. Department of Education and the U.S. Treasury in an attempt to offset the delinquent funds. This is called a student loan tax refund offset.

You’ll know if you’re at risk of an offset through a notice in the mail from the federal government. Keep in mind that private student loans cannot take your tax refund.

The key to avoiding default status on your student loans — and, by extension, having your tax refund taken — is by making your monthly payments on time and in full.

If you’re having trouble making your monthly student loan payments, you’re not automatically destined for default status. You have options and benefits that come with your federal student loans, including:

  • Repayment plans: Income-driven repayment plans base your monthly payments on your family size and monthly income. Once you make 20 to 25 years of qualifying payments, your remaining balance will be forgiven.
  • Refinancing: Refinancing involves taking out a new private loan with a lower interest rate or lower monthly payment to replace your existing student loans. The main downsides to refinancing are that your rate is based on your creditworthiness and you’ll lose all federal benefits and protections.
  • Student loan offset hardship refund: If you’ve experienced financial hardship, you could be eligible for a student loan offset hardship refund. If you qualify, any money withheld from your tax return will be refunded to you.
  • Hardship options: If you’re in danger of defaulting, you can request deferment or forbearance, both of which temporarily pause your student loan payments.

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Written by
Hanneh Bareham
Student loans reporter
Hanneh Bareham specializes in everything related to student loans and helping you finance your next educational endeavor. She aims to help others reach their collegiate and financial goals through making student loans easier to understand.
Edited by
Student loans editor