Will Student Loans Take My Tax Refund for 2025?

Student Finance & Loan Expert

At least 46.2 million Americans had outstanding federal student loans amounting to $1.65 trillion in March 2023. Alarmingly, 25% of these borrowers were in their 50s or older (Ma & Pender, 2023). Moreover, many Americans have also had their student loans defaulted due to non-payment. Thus, the government requires these borrowers to make up for the failure to repay in several ways, including tapping into their tax refund. To help you avoid repaying through student loans tax refund, I, a career-planning expert with over a decade of experience, created this in-depth guide to defaulted student loans, tax refund offset, and the ways by which you can avoid them.

Key Things You Should Know About Student Loans and Tax Refund

Tax refund offsets occur when the United States (US) government uses a borrower’s tax refund to repay a defaulted federal debt. Loans, including federal student loans, are considered delinquent or are defaulted if you fail to pay back your debt based on your agreed terms.
Most federal student loans require borrowers to make a payment within 270 days or 9 months from their last payment schedule, or else they will be considered to be in default.
The BFS can legally claim the entire tax refund amount, up to the total federal student debt owed.

What is a tax refund offset for student loans?
What are the criteria for a tax refund offset for student loans?
How much of your tax refund can be taken to cover student loans?
Can tax refund offsets be applied to both federal and private student loans?
What is the process for a tax refund offset for student loans?
What are the financial implications of a tax refund offset for student loans?
How can you prevent a tax refund offset for student loans?
How to Evaluate Alternative Loan Options for Educational Expenses
How can I access professional guidance for managing tax refund offsets?
What is the process for disputing a tax refund offset for student loans?
What laws govern tax refund offsets for student loans?
What are the latest updates on tax refund offset policies for student loans?
How can you rebuild your credit and financial stability after a tax refund offset?
What are the long-term effects of a tax refund offset on financial planning?
How can specialized loan programs for professional education help mitigate default risks?
How can low cost online universities help reduce student loan default risks?
Can online education empower older borrowers to reduce financial risks?
How does a tax refund offset affect eligibility for future federal aid?
Can exploring online education options reduce your risk of student loan default?
Will upcoming legislative changes reduce the impact of tax refund offsets?
What are effective strategies for managing college living expenses while mitigating default risks?
Other Things You Should Know about Student Loans Tax Refund

What is a tax refund offset for student loans?

Tax refund offsets occur when the government uses a borrower’s tax refund to repay a defaulted federal debt. Loans are considered delinquent or are defaulted if you fail to pay back your debt based on the terms that you agreed to. These debts include the following:

Federal nontax debt, such as student loans
Past-due federal tax
State income tax
Child support
Spousal support

While the Internal Revenue Service (IRS) implements tax refund offsets for past-due federal taxes only, the Bureau of the Fiscal Service (BFS) of the US Department of Treasury manages the offsets for the rest of the debt categories, including student loans tax refund offsets, through the Treasury Offset Program (TOP) authorized by Congress.

Notably, previous years have shown that default rates for federal student loans are highest for Americans with low debt, based on the student loan statistics I found during my research for this guide. Looking at borrowers who started repayment in 2010 and defaulted within 3 years, 66.67% owed $10,000 or less in federal student loans (Baum et al., 2016). In March 2023, 15% of borrowers of federal student loans were in default, with the average defaulted loan balance at $21,500 (Ma & Pender, 2023).

What are the criteria for a tax refund offset for student loans?

As I mentioned in the previous section, student loans tax refund offsets occur when the government keeps a portion or all of a borrower’s tax refund to repay defaulted student loans. Federal student loans become delinquent when a borrower fails to pay by the specified deadline. Meanwhile, most federal student loans require borrowers to make payments within 270 days or 9 months from their specified payment due date, or else their loans will be defaulted.

time it takes to default on student loans

How much of your tax refund can be taken to cover student loans?

The Bureau of the Fiscal Service (BFS) may seize a borrower’s tax refund to cover defaulted federal student loans. The BFS can legally claim the entire tax refund amount, up to the total federal student debt owed. If the refund is less than the debt, the BFS will take 100% of the refund. If the refund exceeds the debt, only the owed amount will be taken. The borrower will receive the remaining balance.

Through the Treasury Offset Program (TOP) of the BFS, federal and state tax refund offsets in 2023 totaled $3.8 billion (BFS, 2023). In 2019, federal tax refunds worth $3.3 billion in total were taken from 1.4 million borrowers. That same year, $48.6 million was taken from 91,000 borrowers through state tax refunds. In 2016, federal tax refund offsets amounted to $2.3 billion, while state tax refunds that were withheld totaled $35.2 million.

The chart below provides a visualization of the amount of federal and state tax refunds withheld by the BFS of the US Department of Treasury through TOP in 2016, 2019, and 2023.

Can tax refund offsets be applied to both federal and private student loans?

Many Americans feel the need to turn to private and federal student loans due to the high cost of bachelor’s degree programs, different life circumstances, or the lack of knowledge on how to save for college. Notably, tax refund offsets can be applied only to federal student loans and not to private student loans. The Treasury Offset Program (TOP) is designed to recover debts owed to federal agencies, including defaulted federal student loans. When a borrower defaults on a federal student loan, their federal and state tax refund can be withheld to repay the debt.

However, private student loans are not eligible for this program because they are issued by private lending companies and not the federal government. Instead, private lenders must pursue other collection methods, such as wage garnishment or legal action, to recover owed amounts. Understanding this distinction is important for borrowers who have both types of student loans, as it emphasizes the differing consequences and repayment strategies needed for each kind of debt.

What is the process for a tax refund offset for student loans?

Understanding the process for student loans tax refund offsets is essential for borrowers who may be facing default. This process involves the Treasury Offset Program (TOP) intercepting federal tax refunds to repay outstanding federal student loan debt. Knowing the steps involved can help borrowers navigate the system and potentially mitigate the impact on their finances:

1. The agency handling federal student loans notifies you about your defaulted debt 60 days before it submits your debt information to TOP. The letter of notification explains the following:

The type of debt you owe
How much debt you have
The agency’s plan to offset your debt using your tax refund
How to resolve or dispute your debt

2. The agency sends your debt information to TOP.

3. TOP checks its database to find out if you have defaulted debt when it is time for you to receive federal payments.

4. If your debt is stored in the TOP database, the program withholds or offsets your tax refund to compensate for your unpaid loans.

5. TOP sends you a different letter to notify you about your federal or state tax refund offset.

What are the financial implications of a tax refund offset for student loans?

Student loans tax refund offset can have significant financial effects on borrowers. When the government seizes a tax refund to repay defaulted federal student loans, it can impact various aspects of a borrower's financial situation:

Reduced Financial Resources. The immediate loss of a tax refund reduces the borrower’s available funds, which could have been used for essential expenses, such as rent, utilities, and meals. This setback can cause stress and financial instability, as it can make managing daily costs more difficult. Notably, the current estimated median annual salary of 119.9 million full-time wage and salary workers in the US is $54,864, based on their $1,143 median weekly salary in the second quarter of 2024 [US Bureau of Labor Statistics (BLS), 2024]. The amount is higher than the $41,233 gross annual income required of a single childless resident of the state of Louisiana to afford typical daily expenses (Glasmeier & Massachusetts Institute of Technology, 2024). However, Louisiana ranked 50th among all US states in terms of economic performance in 2024 (Rich States, Poor States, 2024), so we can imagine how living comfortably can be a challenge on an annual salary below $55,000 for residents of other states.
Increased Loan Costs. By not addressing defaulted loans before an offset occurs, borrowers might face additional penalties. The offset does not eliminate the potential accumulation of interest and late fees on the remaining loan balance and this can potentially increase the total repayment amount over time. So that individuals can avoid additional student debt in the future, they can explore other valid sources of traditional on-campus and online education financial aid.
Credit Score Impact. Defaulting on student loans, which can lead to a student loans tax refund offset, can damage a borrower’s credit score. A lower credit score affects your ability to secure future loans, mortgages, or even employment opportunities. Many employers and landlords check credit history as part of their evaluation process.

How can you prevent a tax refund offset for student loans?

Avoiding student loans tax refund offsets requires proactive management of your loan obligations. The following are three ways by which you can prevent your federal payments from being withheld:

Stay current on payments. Ensure that you make regular, timely payments on your student loans. Enrolling in an income-driven repayment plan can help make payments more affordable based on your income and family size. On-time payments and suitable repayment plans can reduce the risk of default.
Communicate with loan servicers. Maintain open communication with your loan servicer if you are experiencing financial difficulties. They can help you explore options, such as deferment or forbearance, temporarily decreasing or suspending payments without resulting in default.
Consolidate or rehabilitate loans. If you are already in default, consider loan consolidation or rehabilitation programs. Consolidation can combine multiple loans into one, potentially with a lower interest rate, while rehabilitation involves making a series of agreed-upon payments to restore the loan to good standing.

How to Evaluate Alternative Loan Options for Educational Expenses

Exploring alternative loan options can be a critical step for borrowers hoping to avoid the potential consequences of default, such as tax refund offsets. Understanding the variety of loan products available enables students and borrowers to make informed decisions that align with their financial goals and repayment capacity.

For graduate-level education, particularly for those pursuing an MBA, specialized loan products may offer more favorable terms and repayment flexibility compared to federal loans. An MBA loan, for instance, often provides tailored advantages such as extended repayment periods or lower interest rates for qualified applicants. This type of loan can serve as a viable alternative to federal loans, especially for borrowers concerned about default risks and subsequent tax refund offsets.

However, borrowers must carefully evaluate the long-term financial commitments associated with private loans, including interest rates, fees, and repayment terms. Carefully comparing loan options empowers borrowers to choose products that minimize the risk of financial strain while supporting their educational aspirations.

For a detailed analysis of the best financing options available, particularly for MBA students, check out comprehensive resources on MBA loan offerings.

How can I access professional guidance for managing tax refund offsets?

Engaging with specialized advisors can clarify your options and help you navigate the complexities of defaulted student loans with precision. Consider consulting non-profit credit counseling services and legal aid organizations that focus on student loan disputes to review your repayment plans and dispute strategies. In addition, if you are exploring career advancement opportunities, evaluating alternative financing for education may offer a strategic edge. For instance, if considering a shift toward aviation, review pilot training loans as a potential resource to support your professional development.

What is the process for disputing a tax refund offset for student loans?

Americans have the right to reimburse their extra tax payments. While financially stable individuals might treat tax refunds as bonuses, I have found that vulnerable individuals, such as the homeless or those threatened with eviction, may see these reimbursements as a lifeline. Considering uncontrollable situations, such as the pandemic, and the average time to repay student loans, it is essential for you to learn about the ways by which you can dispute student loans tax refund offsets.

Contact the Bureau of the Fiscal Service (BFS). You can reach out to the BFS for more details about the student loans tax refund offset at 800-304-3107 (or TTY/TDD 866-297-0517).
Contact Federal Student AId (FSA) of the US Department of Education. You can reach out to FSA for questions about your student debt data, or if you believe that you do not owe student debt.
Contact the Internal Revenue Service (IRS). You can call the IRS at 800-829-1040 (or TTY/TDD 800-877-8339) if your tax refund is lower than the amount that you expected but you did not receive a notice about an offset.
Contact the Taxpayer Advocate Service. The Taxpayer Advocate Service, an independent agency in the IRS, provides individuals with free assistance in resolving issues that they have with the IRS. You can reach the agency through the official IRS website or 1-877-777-4778.

What laws govern tax refund offsets for student loans?

To effectively avoid or resolve tax refund offsets, you must understand the laws that govern them, according to the Internal Revenue Code:

Title 26, USC 6402(d)
Title 31 USC 3716(c)
Title 31 USC 3720A

These provisions discuss the government’s authority to reduce a borrower’s tax refund by the amount of any past-due, legally enforceable debt owed to a federal agency, such as defaulted student loans, unpaid child support, or overdue federal taxes. They outline the procedures and requirements that must be followed, including notification to the debtor, the opportunity to inspect records related to the debt, and the right to a hearing to contest the debt or the offset. This ensures that the debt collection process is conducted fairly and transparently while enabling the government to recover outstanding debts efficiently.

What are the latest updates on tax refund offset policies for student loans?

In the fourth quarter of 2020, 10.8 million Americans were unemployed—a 4.9 million increase from 2019 levels (US BLS, 2021). The global economic instability caused by pandemic restrictions forced the US government to make urgent changes to federal student loan policy to help vulnerable individuals recover.

Tax Refund Offset Suspension. Among other federal payments for defaulted federal student loans, tax refund offsets were suspended by the US Department of Education until November 2022.
Delinquent Status Suspension. Moreover, since October 1, 2023, the Biden Administration has been implementing its 12-month “on-ramp” to repayment program to help vulnerable borrowers. Those who are not able to make monthly payments until September 30, 2024, will not be considered delinquent, placed in default, or submitted for tax refund offset requests (The White House, 2023). Borrowers with no defaulted loans pre-pandemic will not be impacted by tax refund offsets until after 2025.

The chart below provides a visualization of unemployment levels in the US between 2019 and 2021, according to the US BLS.

How can you rebuild your credit and financial stability after a tax refund offset?

Tax refund offsets can disturb your credit profile and overall financial balance, but targeted strategies can assist in recovery without overlapping previous prevention techniques. Refinancing or consolidating your loans through reputable federal or private programs can help streamline repayment and reduce interest burdens. Additionally, consulting with professional credit counselors can provide personalized debt management and budgeting plans tailored to your circumstances. Pursuing career-enhancing opportunities—such as earning the fastest associate degree—may boost income prospects, laying the groundwork for improved credit health and long-term fiscal resilience.

What are the long-term effects of a tax refund offset on financial planning?

Understanding the long-term consequences of a tax refund offset for student loans is critical for borrowers who want to maintain financial stability. These repercussions can extend well beyond the initial loss of anticipated tax refunds:

Delayed Savings Goals: Losing a tax refund can disrupt plans for saving toward critical financial goals, such as building an emergency fund, contributing to retirement accounts, or saving for a down payment on a house.
Increased Financial Stress: The interception of tax refunds can exacerbate the financial stress of borrowers already struggling with defaulted loans. This ongoing stress may hinder decision-making and lead to a negative cycle of financial mismanagement.
Credit Score Implications: Although the offset itself doesn't impact credit scores, defaulting on student loans and the events leading up to the tax refund offset can damage creditworthiness, making it harder to secure favorable loan terms in the future.
Dependency on Quick Solutions: Borrowers may turn to high-cost financial products or last minute student loans no cosigner options to make ends meet, potentially compounding their financial challenges.
Impact on Future Refunds: Tax refund offsets can recur annually until the loan is resolved, presenting a persistent obstacle to achieving financial stability.
Strained Family Finances: Households sharing financial responsibilities may feel the cumulative effects of reduced resources, disrupting plans for joint expenses or investments.

Addressing these implications requires borrowers to adopt comprehensive financial management strategies, including budgeting, debt consolidation, and exploring ways to improve creditworthiness.

How can specialized loan programs for professional education help mitigate default risks?

Professional education often offers tailored loan products with flexible repayment structures that can lower the risk of default and the subsequent impact of tax refund offsets. These specialized financing options typically provide features such as extended repayment terms, reduced origination fees, and proactive support through financial counseling. For instance, options like dental student loans serve as targeted alternatives designed to accommodate the income trajectories of dental professionals, thereby mitigating the risk of default. Evaluating these specialized products can ensure alignment with professional career plans while maintaining financial resilience against federal recovery measures.

How can low cost online universities help reduce student loan default risks?

Choosing cost-effective online education can serve as a preventative measure against accumulating excessive debt. By enrolling in programs offered by low cost online universities, borrowers may access lower tuition rates and flexible scheduling, both of which help minimize dependency on high-interest loans. This strategic approach not only reduces the overall borrowing required but also diminishes the likelihood of default and the subsequent imposition of tax refund offsets.

Can online education empower older borrowers to reduce financial risks?

Older borrowers face distinct challenges when managing defaulted student loans and tax refund offsets. Flexible online education programs can offer mature students avenues to update skills or transition careers without significantly increasing financial burdens. Tailored curricula and adaptable schedules help older learners balance coursework with existing obligations while potentially lowering overall debt exposure. Evaluating options, such as what is the best degree for elderly people, can enhance career prospects and support more resilient financial planning. This strategic approach addresses both educational advancement and improved long-term credit health.

How does a tax refund offset affect eligibility for future federal aid?

A tax refund offset from defaulted federal student loans does not directly bar borrowers from future financial aid; however, documented defaults can influence credit profiles and trigger increased scrutiny during new aid assessments. Credit history affected by such defaults may lead to stricter lending criteria and less favorable terms for subsequent federal student loan applications or refinancing options. Evaluating alternative financing options, like pursuing an affordable master's degree online, can provide viable pathways to resume academic advancements while managing credit challenges.

Can exploring online education options reduce your risk of student loan default?

Evaluating alternative education pathways may offer a strategic approach to minimizing excessive borrowing and subsequent financial challenges. Cost-efficient online programs often provide flexibility while lowering tuition expenses, which can decrease the need for large student loans and the risk of default. Prospective students committed to sustainable debt management should assess accreditation, program outcomes, and long-term career benefits. In cases where a flexible, affordable learning environment is desired, you might consider apply for online colleges.

Will upcoming legislative changes reduce the impact of tax refund offsets?

Recent policy discussions suggest that forthcoming legislative reforms could introduce borrower protections to limit tax refund offsets for defaulted student loans. Lawmakers are evaluating mechanisms to implement income-based thresholds and refine dispute procedures, aiming to balance federal debt recovery with financial sustainability. These proposed changes may offer structured relief by potentially reducing the overall offset amount and providing more transparency in the enforcement process. Monitoring regulatory proposals and engaging with professional financial advisories can help borrowers anticipate and prepare for these adjustments. For career advancements that support long-term financial stability, consider exploring opportunities highlighted in top female jobs in USA.

What are effective strategies for managing college living expenses while mitigating default risks?

When planning for college expenses, borrowers should consider structuring their financing to clearly separate academic costs from everyday living expenses. This approach can limit the amount of debt exposed to default risk and subsequent tax refund offsets. Leveraging targeted borrowing can make it easier to meet monthly needs without incurring prohibitive repayment obligations. For instance, exploring options specifically designed for student loans for living expenses may offer flexible disbursement schedules and lower interest rates, thus reducing financial pressure and safeguarding essential living costs. Evaluating these strategies alongside income-driven repayment plans and comprehensive budgeting can promote more resilient financial planning and minimize the overall risk associated with defaulted loans.

Key Findings

According to the latest data, 46.2 million Americans have outstanding federal student loans.
15% of borrowers of federal student loans were in default as of 2023.
The average defaulted loan balance is $21,500.
The estimated annual salary of full-time workers in the US is $54,864 as of 2024.
Through the Treasury Offset Program (TOP) of the BFS, federal and state tax refund offsets in 2023 totaled $3.8 billion.

Other Things You Should Know about Student Loans Tax Refund

Is the IRS garnishing tax refunds 2025 for student loans?

The Bureau of the Fiscal Service (BFS) of the US Department of Treasury, not the Internal Revenue Service (IRS), handles federal student loans tax refund offsets. Regularly check the BFS website to stay updated on policy changes in the Treasury Offset Program (TOP).

How do I avoid tax refund offset?

To avoid a federal student loans tax refund offset, ensure you stay current on your loan payments by enrolling in an income-driven repayment plan or seeking forbearance or deferment if experiencing financial hardship. Moreover, regularly communicate with your loan servicer to explore repayment options and address any potential issues before they lead to default.

What is a hardship refund?

A hardship refund is a reimbursement of an intercepted tax refund granted to borrowers who can demonstrate severe financial hardship after their refund has been offset for defaulted federal student loans. To request a hardship refund, borrowers must provide documentation proving their financial difficulties and apply through the Bureau of the Fiscal Service (BFS).

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