Defaulting on Your Student Loans: Tax Refund and Social Security Intercepts

You might lose your tax refund or a significant portion of your Social Security benefits if you’re in default on your federal student loans.

By , Attorney

If you're expecting a large tax refund—and you've defaulted on a federal student loan—don't count on seeing the money. The U.S. Department of Education can ask the IRS to intercept (take) your tax refund and apply the money to your debt. This process is sometimes called a student loan "tax refund offset." The government can also take federal benefits that are usually exempt from collection, like Social Security, to repay a defaulted federal student loan. Collectively, these kinds of takings are called "Treasury offsets."

Intercepting Tax Refunds to Repay Student Loans

Intercepting tax refunds is the method the government most frequently uses to collect outstanding student loan dollars. Each year the federal government pockets hundreds of millions of dollars by grabbing tax refunds (without having to get a judgment first) from defaulted student loan borrowers. And if you legitimately owe the money, stopping a tax refund intercept is very difficult.

Notification and defenses. Before the government takes your money, you'll get notice, an opportunity to review the loan records, and a chance to challenge this decision. A few of the possible defenses that might stop a tax refund intercept are:

  • Your debt has been paid.
  • It's not your loan.
  • You entered into a repayment agreement with the loan holder and you're making the required payments.
  • You have filed for bankruptcy and the case is still pending or the debt was discharged.
  • The borrower is dead. (Learn about cancelling federal student loans after a borrower's death.)
  • The debt isn't enforceable, perhaps due to forgery.
  • You're eligible for a student loan discharge, like a closed school discharge.

(Learn more about how to challenge a student loan tax refund intercept.)

Avoiding a tax refund intercept. If your tax refund is small, you will have less to lose from an intercept. To make sure your tax refund is minimal, you can increase the money you receive with your paycheck during the year. For example, suppose you got a $1,440 tax refund last year. This year, you might want to ask your employer to take out $120 less each month. Use the IRS withholding calculator to help you figure out how much to ask your employer to withhold.

Social Security Garnishments to Repay Student Loans

The Debt Collection Improvement Act of 1996 (31 U.S.C. § 3716(c)(3)(A)(i)) allows federal government agencies to offset Social Security benefits to collect debts like student loans, although the government must let you keep a certain amount. Specifically, the Act exempts benefit payments totaling $9,000 over a 12 month period ($750 on a monthly basis) and the government can't take more than 15% of your benefit.

Unlike almost every other kind of debt, there is no statute of limitations for collection of federal student loans. This means that even 20 or 30 years after you went to school, the government can continue to try to collect your loans. A 2016 report from the U.S. Government Accountability Office found that tens of thousands of older citizens have had their Social Security (mostly disability) benefits garnished to satisfy old, defaulted federal student loans. Most people lost around $140 per month to garnishment.

If you're totally and permanently disabled, though, you could be eligible for cancellation of your federal student loans. Many people simply aren't aware of this option and continue to have their Social Security garnished.

Avoiding Tax Refund Intercepts and Social Security Garnishments

To protect yourself against a tax refund intercept or a Social Security garnishment in the future, it's best to avoid student loan default. But if you're already in default, here are a few ways to get out of it.

Loan rehabilitation. If you're already in default on a Direct Loan or FFEL program loan, you might be able to rehabilitate the defaulted loan by making nine payments (the loan holder determines the amount) within 20 days of the due date during a period of 10 consecutive months. Depending on your income, the monthly payment amount could be as low as $5. When you've rehabilitated the loan, your loan is no longer in default. But if you rehabilitate your defaulted loan and then default on that particular loan again, you can't rehabilitate it again. It's also possible to rehabilitate a defaulted Perkins Loan. (Learn more about federal student loan rehabilitation at the U.S. Department of Education website.)

Loan consolidation. Another way to get out of default is to consolidate your federal student loan debt into a Direct Consolidation Loan. To consolidate a defaulted federal student loan into a new Direct Consolidation Loan, you have to either agree to repay the new Direct Consolidation Loan under an income-driven repayment plan, or make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before you consolidate it. You may apply for a Direct Consolidation Loan through (Learn more about federal student loan consolidation at the U.S. Department of Education website.)

Bankruptcy. Though it's not common, you might be able to discharge your student loans through bankruptcy. If you want to learn more about this possibility, consider talking to a bankruptcy attorney.

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