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Because the student loan repayment pause has been extended past the April 18, 2023, tax deadline, borrowers in default are not at risk of their 2022 tax refund being seized. However, the Consumer Finance Protection Bureau (CFPB) predicted that once student loan payments resume, borrowers between 30 and 49 years old will likely face the most difficulty making student loan payments.
If you’re concerned about your loans going into default and want to avoid future collections activities, now might be the time to make a plan for your student loans.
Will student loans take my tax refund in 2023?
Normally, if your student loans are in default status, your tax return will be seized to cover some of the defaulted balance.
However, the government halted all student loan collections on federal student loans at the start of the pandemic. The relief currently lasts through June 30, 2023, whether or not the Supreme Court decides the student loan debt relief program.
This means that your tax return won’t be taken to offset your outstanding federal student loan balance for the 2023 tax season. The U.S. Department of Education says these collections will stay paused for six months after this payment pause ends.
Eligible loans include:
- Defaulted Direct Loans.
- Defaulted FFEL loans.
- Defaulted Perkins Loans owned by the Education Department.
- Defaulted HEAL loans.
That said, this is a temporary relief measure; when filing your 2024 taxes next year, this will likely not apply.
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. 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 making your monthly payments on time and in full.
If you’re having trouble making 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 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.
- Consolidation: Loan consolidation allows borrowers to combine their federal student loans into one, making repayment more manageable and affordable. Borrowers who consolidate their student loans also become eligible for certain loan forgiveness programs.
- 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, which temporarily pause your student loan payments.
If I owe student loans, will I get a tax refund?
It’s possible to receive a tax refund if you have student loans. Simply owing money on loans does not prevent you from getting a refund — defaulting on those loans does.
Whether you receive a tax refund depends on your unique tax situation. For instance, you may receive a refund if you overpaid your taxes in 2022 or qualify for certain tax credits. However, you may owe the IRS money if you underpaid your taxes.
The bottom line
The student loan tax offset has been suspended through June 30, 2023. If you have federal student loans in default, your 2022 tax return won’t be taken to offset your defaulted loan balance if you file your 2022 tax return by the filing deadline.
If you think you’ll have trouble repaying your loans once the payment pause ends on June 30, 2023, consider enrolling in an income-driven repayment plan, refinancing or consolidating your loans to lower your monthly payments. Alternatively, consider placing them in forbearance or deferment if you’re in danger of defaulting.