For anyone getting a refund, tax season is the best time of the year. But for those who have defaulted on their federal student loans, the IRS can seize their potential joy in paying off federal debt. This is called tax offset.
It may not be tax season right now, but it’s never too early to start preparing to secure your refund. Specifically, if you have federal student loans that are in default, it is in your best interest to be in good standing before the Department of Education decides to collect your tax refund.
If you’re worried about the IRS refunding your tax money, you’ve come to the right place. The Department of Education announced that it has restarted collection activity, and will refund your tax money in 2026 if you are in default.
Basics of student loan tax offsets
First, tax damages are legal. the Treasury clearing programcreated in 1986 and overseen by the Bureau of the Fiscal Service, allows departments of the federal government to request that the IRS seize tax refunds to pay debts owed to the federal or state governments.
Unlike private loans, the federal government doesn’t need anyone’s permission to garnish your earnings, including your tax refund, if you default on your federal student loans.
In the case of federal student loans, the Department of Education may send a request to the Treasury to seize your tax refund to use toward defaulted loans. If they do, they could get your full tax refund. If the debt is paid and any refund remains, it will be returned to you.
If you have a spouse with whom you file your taxes jointly, the IRS can seize your entire joint tax return, even if your spouse is not connected to your federal student loan. However, it is possible for your spouse to have their portion of the refund returned to them. Check out our guide to filing for injured spouse relief.
This is important to note, because There is no statute of limitations for federal loansthe IRS can offset your taxes for each year that your federal student loans are behind.
Fortunately, the IRS is legally required to notify you by mail of its proposal to offset your taxes and allow you some time to respond.
If you have delinquent federal student loans, you may receive a letter in the fall letting you know that the IRS plans to recover your potential tax dollars and apply them to your education debt. The letter will include information about your loans and instructions on how to proceed.
Once you get the message, you can do one of three things:
- Request a review to appeal the displacement.
- Agree to pay the debt.
- Do nothing.
Related to: Student Loan Collection Restrictions Act
Request a review to appeal the offset
First, check all the information in the letter and compare it to your loan records and accounts. You can also request an official copy of your loan information from the Department of Education. If anything seems amiss, you have the right to request an audit hearing, where you will have the opportunity to prove that your taxes should not be offset.
Here are some common reasons you might request a review session:
Challenging displacement can be difficult, so you need very convincing evidence. If you are determined to pursue this course of action, consider the use of an attorney and the costs of doing so.
Agree to pay the debt
If you agree that you owe the debt, that doesn’t mean you’re expected to pay it all at once. Sure, you pay if you can afford it, but we believe that if you’re here, you won’t be able to do it.
Alternatively, you can enter into a written agreement with the Department of Education to repay the debt. How will you pay off the debt? First, you’ll need to take the necessary steps to remove your loans from default. This could include rehabilitation or virtual integration.
Next, we suggest looking into federal repayment plan options so you can avoid defaulting again in the future.
Of the various repayment plans offered by the Department of Education, borrowers who default are likely to benefit the most from income-based repayment plans. In these plans, your payment amount is calculated each year based on your income and family size and can go up to zero. Additionally, after 20 to 25 years, any remaining balance is forgiven.
Of course, do thorough research before signing up for any payment plan. There is no one size fits all, so make sure the option you choose suits your condition.
Related to: How to choose the best student loan repayment plan
Do nothing
If you choose not to take action, miss deadlines to take action, or never receive a letter warning you of the proposed tax offset, the IRS will refund your tax money. Fortunately, you’re not completely out of luck at this point.
If you believe you have been refunded in error, you can contact the Department of Education (no IRS) to appeal the offset. Review the list above of common reasons to request a review hearing for the types of errors that could result in your refund being issued to you.
If you were not refunded in error but you can prove financial hardship, you may be able to have at least part of your refund refunded to you. This method is Very difficult It is not guaranteed to be successful.
If you file your taxes jointly with your spouse, they can file an “affected spouse” claim to recover their share of the tax refund. Learn more about filing Injured Spouse Form 8379 here.
Private loan tax compensation
If you have private loans and fall behind, you don’t have to worry about not getting your tax refund; Private loan collectors have no way to seize the refund.
However, your private loan servicer can take action to collect on your loans much sooner than federal servicers can. Unlike federal servicers who can’t take collection action until 270 days after loans are due, private servicers can take collection action once you’re late on just one payment.
If your private loans are delinquent, your private loan provider can sue you for being able to garnish your wages and freeze your bank account. Court approval is the only way a private servicer can take your winnings, so you have a much better chance of preventing this if you appear in court with a good defence.
How to prevent tax offsets
If you’re approaching or defaulting on your federal student loans, it’s best to take action so they don’t remain in default come tax season. This means either addressing the default through default rehabilitation or consolidation or entering into a payment plan with affordable monthly payments so you can work on staying current.
If you’re not quite sure where to start or what to do, consider hiring a professional to help you with your student loans. We recommend using our Student Loan Planner to help you create a solid financial plan for your student loan debt. Payment Student loan scheme here.
We analyze the process for exiting the default mode here: How to get out of student loan default in 5 easy steps.
We appreciate hearing your thoughts and experiences in the comments below.
