The Government May Seize Tax Refunds from Student Loan Borrowers, Warns Groups

A coalition of advocacy groups issued an announcement this week, warning borrowers with defaulted federal student loans that the government could take their federal tax refunds this year.

“Working families depend on critical tax credits to stay afloat during the current growing affordability crisis and stagnant wage growth,” said Protect Borrowers in a statement on Tuesday. “Tax credits, like the Child Tax Credit and Earned Income Tax Credit, are critical anti-poverty programs. Seizing these tax refunds—especially without warning—throws families into financial tailspins, preventing them from affording critical needs like repairing a car to drive to work, or catching up on past rent and utility bills.”

Here’s what student loan borrowers should know, and how you can protect yourself from a tax refund seizure.

Federal government can seize tax refunds for defaulted federal student loans

The government has powerful collections tools it can wield against borrowers with defaulted student loans. These tools allow federal agencies to take certain income from borrowers involuntarily, without filing a lawsuit or needing to obtain a court order.

One of these tools is the Treasury Offset Program. 

How the Treasury Offset Program works 

The Treasury Offset Program allows the government to intercept or offset federal income streams or benefits owed to a borrower, such as federal salaries or contract income, federal benefits such as Social Security, and — most importantly for many individuals — federal tax refunds. 

The federal student loan default collections apparatus was largely shut down for the last five years due to the pandemic pause and post-pandemic flexibilities. But the Trump administration has restarted collections operations for defaulted federal student loans, and this year will be the first tax filing season during which borrowers with defaulted federal student loans are at risk of tax refund seizure. 

There is no time limit (also known as a statute of limitations) for federal student loan collections.

“The government has begun seizing tax refunds from borrowers in default for the first time since 2020,” warned the National Consumer Law Center (NCLC) in a blog post last month. “It can even take refunds that include thousands of dollars of Child Tax Credits and Earned Income Tax Credits — financial lifelines for working families.”

Student Loan Borrowers Can Find Out if They’re at Risk of Tax Refund Seizure

In the announcement this week, Protect Borrowers and NCLC announced a “Dial Before Your File” campaign to educate borrowers about the Treasury Offset Program and to warn borrowers to check to see if they are on the Treasury Offset list prior to filing their tax return.

How to check your status before filing taxes

“As borrowers prepare to file their taxes, they should first check if their federal student loans are in default and take extra precautions—or potentially risk having their tax refunds seized,” said the groups in their statement on Tuesday. “Student loan experts advise borrowers to ‘Dial Before You File’ to find out if their refunds are at risk. They can call the Treasury Department’s Treasury Offset Program Call Center at 1-800-304-3107 to see if they are on the list to lose some of—or all—of their federal tax refund.”

“If your name is on the list of people at risk of having their tax refunds seized, you should take steps to get your loans out of default before you file your federal income taxes,” said Kyra Taylor, Staff Attorney at the National Consumer Law Center. “You might want to file for an extension so you have time to take steps to protect your refund.” 

The Education Department and federal guaranty agencies for defaulted FFEL-program student loans must send out a Treasury Offset notice to borrowers prior to putting someone on the tax refund seizure list. 

That notice gives borrowers 65 days to object, request a hearing or take certain steps to get their student loans out of default. But borrowers don’t always receive that notice, particularly if they have moved or the notice is sent to an outdated address.

Why borrowers may not receive advance notice

“Generally, the government will not reach out to tell someone it will take their tax refund beforehand,” said the groups. “It might only send a single notice when a debt first goes into collection—and many people miss that letter. However, each year, the federal government creates a list of people who owe it money and who may have their tax refunds taken to collect on the debt. By calling the hotline, anyone can learn whether their name is on that list.”

Get student loans out of default to avoid tax refund seizure

NCLC and Protect Borrowers urged those who have defaulted federal student loans to take steps to get their loans out of default and back into good standing to protect their tax refunds, or pursue a student loan discharge if eligible.

“If your name is on the list, there are several steps you can take, including: Filing for an extension; beginning the process of getting loans out of default… [and] finding out if student loans are eligible for a loan cancellation or discharge program,” said the groups in their statement.

Loan rehabilitation vs. consolidation

One option to get federal student loans out of default is rehabilitation, a temporary repayment program lasting at least nine months that ends with the borrower’s defaulted federal student loans being restored to good standing. 

Another potential option is Direct Loan consolidation, which allows borrowers to take out a new federal student loan from the Department of Education that pays off the defaulted loans. 

But while there are benefits to both programs, there are potential downsides, as well.

“If you consolidate your loans right now, there is a risk that you may lose any time towards IDR forgiveness that accrued on your loans before consolidating,” warned NCLC in the blog post. “So if you’ve spent many years making payments on your loans and are close to having your loans forgiven through IDR, consolidating could delay when your loans are eligible for forgiveness. In addition, if your consolidation loan is disbursed after July 1, 2026, it will have different repayment options than loans disbursed before that date.”

Rehabilitation has its own potential downsides. “Loan rehabilitation takes much longer than consolidation, is more complicated to set up, and requires that you carefully watch your mail so that you can send back the required documentation,” said NCLC. “If you do not make 9 months of on-time, full payments, your loans will not be removed from default.”

When student loan discharge may apply

Borrowers can also explore student loan discharge programs, such as a disability discharge or closed school discharge, depending on eligibility. 

“Federal student loans, including loans in default, can be cancelled (also called ‘discharged’) in certain situations, such as if you are unable to work due to a permanent disability,” said NCLC. “If all of your loans in default are cancelled, then you will no longer have loans in default and will not have your tax refund seized. But it can take months (or sometimes even years) for your loan discharge application to be decided.”

Act early to protect your tax refund

Ultimately, borrowers with defaulted federal student loans should take steps now to determine if they are on the Treasury Offset list that puts them at risk of a tax refund seizure, and if so, start exploring options for resolving their default.