How Can I Stop Student Loans from Taking My Taxes?

Update: Due to the pandemic, the IRS has extended the tax deadline for the 2020 tax year from April 15, 2021 to May 17, 2021. This only applies to individual federal income returns and tax payments, not a state’s income tax deadline, including state payments or deposits. 

Going through student loan repayments can be a hassle. However, due to the COVID-19 pandemic, student loan payments and collection attempts have been paused until September 30, 2021. This means you have more time to find ways to repay your student loans before you have a defaulted loan. And it’s very important to do it quickly. Otherwise, your tax refund could be taken from you. Take advantage of all the resources available to stay up to date on your student loans and protect your refund.

So, how can you stop student loans from taking your refund? Use these tips to prevent your student loan status from impacting your income tax refund.

Table of Contents

  1. How Do I Know If My Student Loan Will Take My Tax Refund?
  2. What Happens When Student Loans Take My Tax Refund?
  3. Can The IRS Take All of Your Refund for a Student Loan in Default?
  4. How COVID-19 Affected Student Loans
  5. Can I Get My Tax Refund Back after an Offset?
  6. How Can I Stop Student Loans from Taking My Refund?
  7. Keep Your Refund: Ditch the Default Status

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

You probably already know your student loans are delinquent—but you might not know when they go from delinquent to being in default. There’s a distinct difference between these two statuses. Loans become delinquent when you fail to make a payment by the specified due date. If you continue to be delinquent on your loans, they then go into default. This means you won’t be eligible for any additional aid and legal action can be taken by the loan provider to reclaim the owed amount. 

In the first instance, you still have the opportunity to enter a loan repayment program; in the second, your options get far more limited. 

If it’s been more than 270 days since your last Direct Loan payment, you’re probably in default. Perkins loans go into default even more quickly—sometimes entering the default stage immediately.  A Perkins loan is a low-interest, federally subsidized loan available to students that show great financial need. 

Student loans in default heavily impact your credit. At this stage, the IRS might also come after your tax refund. If it does, you’ll receive a refund offset notice in the mail in advance of the proposed refund garnishment. If you pay your student loan balance before the IRS issues your tax refund, your refund won’t be garnished.

What Happens When Student Loans Take My Tax Refund?

To garnish—i.e., take—your tax refund, lenders have to go through the Treasury Offset Program (TOP). Before making a decision, TOP reviews the lender’s request to determine if it’s legitimate. If you do appear to owe the lender money, TOP diverts all or part of your refund to cover the debt. At this stage, your credit score will probably take a major hit, too.

Can The IRS Take All of Your Refund for a Student Loan in Default?

In short, TOP can take your federal income tax refund to pay back your student loans if the amount you owe is more than the amount of your tax refund. Take this scenario, for example:

  • Bill owes $2,300 in federal loans, and he is in default. He filed his 2019 federal income tax return in March 2020 and received an $1,100 federal income tax refund. 
  • TOP took his refund, leaving him with a $1,200 delinquent student loan balance.

To make things more complex, TOP can claim your federal refund year after year if you still owe money after the first wage garnishment. And the amount you owe continues to accrue interest:

  • In April 2020, Bill’s delinquent loan balance stood at $1,200. With interest and fees, his balance grew to $1,350 by January 2021.
  • In February 2021, Bill filed his federal taxes and received a $1,250 refund. TOP diverted the entire refund, leaving Bill with an outstanding delinquent student loan balance of $100.

This hypothetical example illustrates how expensive delinquent student loans are, and how long the recovery process can drag on. If you can repay your student loans via a personal loan or a gift from a friend or relative, look into your options to find what works best—it could help you avoid hundreds or even thousands of dollars in interest and fees.

If your student loan balance is less than your tax refund, you’ll receive the remainder of your tax refund amount after TOP takes its share.

How COVID-19 Affected Student Loans

Amidst the COVID-19 pandemic, those with student loans experienced some relief in 2020 through the CARES Act. This suspended loan payments, set interest rates at 0%, and ceased collections on defaulted loans. The forbearance period was extended until September 30, 2021, with any additional measures of executive orders yet to be ratified. 

So, this payment freeze can give you enough time to make a plan to repay your student loans. If you were in danger of student loan garnishment, make sure to confirm with your employer whether your loans are eligible for garnishment suspension for 2020. Or, contact the loan servicer if you want to continue payment arrangements. 

Can I Get My Tax Refund Back after an Offset?

Under certain circumstances, you can get your tax refund back after an offset. Let’s look at three examples:

  • Injured spouse: If your spouse’s delinquent student loans led to the seizure of your joint refund, you may be able to file an injured spouse claim to get your portion of the refund back.
  • Double payment: If you can prove you’ve already paid your delinquent student loan debt, you should get back any erroneously garnished income tax refunds. To correct errors and make a claim, contact the Department of Education.
  • Financial hardship: If you’re in default but in dire financial straits and you can’t afford to lose your refund, you can file a student loan tax offset hardship refund form. By itself, a rocky financial situation isn’t enough—but if you’re in active bankruptcy or  permanently disabled, you may qualify.

If the loan in question doesn’t belong to you—or if you don’t believe it’s an enforceable debt—call the Treasury Offset Program right away at 800-304-3107.

How Can I Stop Student Loans From Taking My Taxes?

To stop student loans from taking your refund, try your best to stay current and catch up as soon as possible if your payments become delinquent at any time. If you receive a refund offset notice from your loan provider, try to seek a solution before your refund goes bye-bye. Here’s how:

  • Get a copy of your file: Ask your loan provider—in writing—for a copy of your file within 20 days of receiving the offset notice. Use certified mail to ensure your provider receives your request.
  • Challenge the offset: If you think the proposed offset is incorrect, don’t be afraid to challenge it. Maybe your school didn’t pay you a refund; or you can prove you’re not in default. Either way, challenge your offset within 15 days of receiving your file or within 65 days after the offset notice (whichever comes first).
  • Set up a payment arrangement: Contact the Department of Education or your loan provider. See if you can set up a monthly payment arrangement to bring your loan current before your refund gets taken. 
  • Adjust your W-4 withholdings: If you think your refund might get tapped and you can’t afford the risk, adjust your W-2 withholdings so that you pay less tax on your wages in the first place.

Keep Your Refund: Ditch the Default Status

To keep your refund, you need to ensure that your student loans are current. You have options if you’re currently delinquent—or even if you’re already in default. If you’re permanently disabled or make 20 years of income-driven loan repayments, you may qualify for student loan forgiveness, for example. Other roads to student loan forgiveness also exist, so look into that option before you do anything else.

If you don’t qualify for student loan forgiveness, try to adjust your existing repayment plan. Set extra money aside if you can, and make extra payments to pay off your loan faster. Consider applying for a debt consolidation loan to get current and reduce student loan interest payments. 

Finally, make sure you file your tax return before April 15, 2021 to avoid late filing penalties. DIY tax software like TaxAct can help you quickly file with confidence and get your maximum refund. 

Hot tip: If you use ExtraCredit to sign up for TaxAct, you’ll get 25% off your state and federal filing.

25% offer is only valid until 10/31/21 at 11:55 pm CT for state and federal 2020 online returns and specified ancillary services and may not be combined with other offers. Additional fees apply for state returns. Add sales tax for applicable orders. Intended only for customers using the offer link provided directly by to create a new return. 

Read more about the TaxAct Maximum Refund and $100k Guarantees. Click for more about TaxAct guarantees.”

All TaxAct offers, products and services are subject to applicable terms and conditions. Price paid is determined at the time of filing and is subject to change.

The TaxAct® name and logo are registered trademarks of TaxAct, Inc. and are used here with TaxAct’s permission.

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