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Federal student loans have some of the most forgiving repayment options. If you can’t make student loan payments because of financial issues, you may be able to pause those loans via a deferment. But if you default on your student loans and you have serious student loan debt, collectors can take numerous actions against you—including taking your tax refund.

How Do I Know If My Student Loan Will Take My Tax Refund?

Your loan servicer won’t just take money from your tax return automatically. First, you must have one or more federal student loans that are in default. For Direct Loans, this means you have been in past-due status on the loan for 270 days or more. Other loans, such as Perkins loans, may go into default even faster.

If you’ve received notification that your federal student loan is in default, there’s a good chance the lender may move to garnish your tax return. You will receive an offset notice before this occurs. That provides you some time to attempt to resolve the issue before tax returns are filed.

What Happens When Student Loans Take My Tax Refund?

The lender must go through the Treasury Offset Program, or TOP, to garnish your tax refund. Garnish means that part or all of the tax refund owed to you is used to pay toward your debt. TOP will review the request and divert funds from your tax refund to pay your student loan creditor if you appear to owe them money. And the consequences can go beyond this—defaulting on a student loan can have dire consequences on your credit score.

Can They Take All Your Taxes for a Student Loan in Default?

TOP will garnish all of your return if you owe that much or more in defaulted student loans. For example, if you owe $1,000 and your return is $900, all of it can be garnished. If you only owe $500 and your return is $1,000, you will receive the remaining $500 after your debt is covered.

What Can You Do if Your Refund Was Seized?

If an offset has already occurred and your tax refund has been seized, you may have a few options for getting the refund back.

  • If you have repaid the loan or some other error has caused it to be shown in default by mistake, you can contact the Department of Education. You may be able to get the tax return refunded once any errors are corrected.
  • Spouses who have had their refunds claimed because of their partner’s debts may be able to file an injured spouse claim. This typically requires the insured party to not know the default and its impact on tax returns.
  • If you were in default but you simply can’t afford not to receive your tax return because of financial hardship, you can apply for a hardship refund. Unfortunately, tight finances aren’t enough to receive this reprieve. Some situations that will qualify you include:
    • Being in active bankruptcy that includes the student loan
    • The loan doesn’t belong to you to begin with
    • You’re permanently disabled
    • The loan isn’t actually enforceable

Ask your lender for a student loan tax offset hardship refund form or call the Treasury Offset Program at 800-304-3107 to begin this process.

How Can I Stop Student Loans from Taking My Taxes?

Your best chances of keeping your tax refund come when you take action before the money is seized. Since your loan service provider must notify you that it plans to proceed with an offset, you usually have time to do so. Here are some steps to take.

  1. Request a copy of your loan file. You must do so within 20 days of receiving the offset notice. Request in writing and consider sending it certified mail for documentation purposes.
  2. Challenge the offset if you have reason to believe it is incorrect. Reasons include that you are not in default or did not receive the money because the school didn’t pay you a refund that was owed. You must make the challenge in writing within 15 days after requesting the loan file or 65 days after the offset notice, whichever comes first.
  3. Contact the loan provider or Department of Education and set up a payment arrangement. If you can get current on your loan or get out of default before tax returns are filed, you may be able to avoid offset.
  4. Adjust your withholdings on your W2s. This doesn’t change the past, but it can ensure you receive more in your paychecks going forward and have less tied up in a tax refund. That helps reduce the hit if you’re unable to remedy the default before the next tax refund.

Avoiding Default Situations to Begin With

Of course, the best way to stop your tax return from being seized because of student loans is to keep from defaulting in the first place. Consider some of the student loan forgiveness options and whether they can help you clear these debts.

If a loan forgiveness program isn’t an option, try to manage your budget to cover some extra payments on your student loans. You can also consider a debt consolidation loan. You may be able to group all your student loans together for easier management or clear up some credit card debt that’s making it hard for you to cover other payments.

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