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The Surprising Way Student Loan Borrowers Can Lose Their Tax Refunds

By Maurie Backman – Feb 28, 2020 at 6:00AM

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Hint: It has to do with not paying your debt.

Many people take out student loans but struggle to repay them after the fact. While it's one thing to be late with the occasional payment, it's another thing to default on that debt entirely. And if you wind up defaulting on a federal student loan, you could face a very unwanted consequence -- having your tax refund garnished.

Chances are, you count on your tax refund to pay your bills, so the last thing you want to do is have that money taken away. Here’s what you need to know about student loan tax refund garnishment.

A stressed woman reading paperwork while sitting on her couch.

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When do federal student loans enter default?

If you're worried that a single missed student loan payment will cause your tax refund to be held back, don't panic. In order to be subject to any type of wage garnishment, you must officially be in default on your student debt. Federal student loans enter default when you’ve gone a full 270 days without making a payment. As such, falling behind for a few months won't put your tax refund at risk (but it can still hurt your credit score, so try not to be late on your payments at all). 

But if you do go nine months without repaying your loans, the federal government can garnish not only your wages, but also your tax refund. 

Of course, that won't happen without warning. If your refund is subject to garnishment on account of defaulted student debt, you'll receive a notice stating that the money you'd normally get back from the IRS will instead be used to offset your outstanding obligation. And that notice will generally come well ahead of when refunds are issued, which means you have time to take action to avoid that garnishment. 

How to avoid default

How can you stop your tax refund from getting taken away? 

You can start by repaying some or all of the debt you fell behind on, but that's probably easier said than done if you’ve reached the point of default in the first place. You can also try contesting your refund garnishment, but you'll usually need a good reason, such as an argument that you've recently undergone an extreme hardship.

Clearly, defaulting on federal student loans can have some pretty unsavory consequences. If you'd rather not put your tax refund or wages at risk, don't let yourself reach that point. Rather, explore other options for relief. 

For example, you might apply for an income-driven repayment plan, which will recalculate your monthly federal loan payments based on what you earn. You can also apply for student loan deferment, and if approved, you'll be allowed to hit pause on your federal debt for a limited period of time. And to be clear, when your loans are in deferment and you go 270 days without a payment, you're not considered delinquent. 

Can private lenders garnish my refund?

The good news is that if you default on private student loans, your refund can't be garnished -- that option only applies to federal loans you fall behind on. But private lenders can still garnish your wages once you default. Clearly, it pays to keep up with your student debt one way or another. 

If you can't make your regular payments, explore the aforementioned protections available to federal loan borrowers, or ask your private lender to negotiate its terms. Some private lenders will even allow you to defer your payments if you can prove you’re experiencing a financial hardship, so reach out to discuss your circumstances. It's a better bet than throwing your hands up in the air and resigning yourself to a host of negative financial repercussions. 


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