IIn previous tax seasons, borrowers whose federal student loans were in default could have their tax refunds garnished to pay off their outstanding student debt. But due to the extended student loan protections that were announced earlier this year, student loans won’t take your tax refund in 2022.
In fact, all federal student loans, including delinquent or defaulted accounts, will receive a clean slate when student loan repayments resume. Here’s what you need to know about the impact of defaulting on a federal student loan on your tax refund and how to avoid losing your tax refund in the future after the restarts. payments.
Can student loans take your tax refund?
During the Covid-19 pandemic, the government suspended all collection activities for defaulted federal student loans, including garnishing tax refunds, wages, or social security payments. This “free pass” for defaulters protects borrowers’ extra cash flow at a time when inflation is squeezing budgets across the country.
Prior to the announcement of this update, the usual rules stated that a federal student loan account was delinquent after 90 days of non-payment. If no payment was made for 270 days (approximately nine months), the account status was considered to be in default.
At this point, your student loan officer can report your overdue or defaulted debt to the Treasury Clearing Program (TOP) for collection of the amount you owe.
How the Treasury Compensation Program May Withhold Your Tax Refund
The TOP, which is managed by the Bureau of the Fiscal Service, compares federal payments you may be owed, such as a tax refund or Social Security benefit payment, with the outstanding debt you owe the government. federal.
It determines this by matching the name and taxpayer identification number (like your social security number) on your tax refund, with the same information on the defaulted debt.
If the agency confirms that the debt is valid and that collections can be applied, it applies your tax refund to your debt. This is called an “administrative lag”. In fiscal year 2021, more than $4.5 billion in outstanding debt was collected through this process.
Will student loans take my tax refund in 2022?
During a typical tax season, if you owe money on delinquent student loans, you may not be able to get a tax refund. But thanks to the latest student loan relief rules, your tax refund won’t be taken in 2022 for delinquent student loan payments.
Federal student loan repayments and recovery loans are still on administrative hiatus. As part of the government’s emergency Covid-19 relief effort, borrowers whose eligible federal loans are in default or overdue will receive a fresh start when loan repayments resume. In other words, borrowers will re-enter repayment in good standing.
Types of eligible federal loans include:
- Direct loans
- Federal Family Education Loan Program (FFEL) Loans
- Federal Perkins loans held by the Department of Education
- HEAL Loans
With your loans in good standing, the TOP no longer has the ability to collect the outstanding debts you owed when your loans were in default. You will be able to keep your tax refund (if you have one), assuming your federal loan account remains in good standing.
When federal loan repayments restart, eligible student borrowers who fall back into default are still protected from having their tax refund withheld for an additional six months. This means that throughout the 2022 tax season, you are protected against administrative compensation due to a default on a federal student loan.
However, beginning in March 2023, tax refunds during next year’s production season may be withheld if your loans are past due or in default.
How to avoid having your tax refund seized
Once regular loan collection rules are reinstated, you may not get a tax refund if you owe defaulted student loans. If you’re worried about losing your tax refund in the future, here’s what you can do to avoid it.
- Contact your service agent for reimbursement plan alternatives. If you want a more manageable monthly payment plan, talk to your loan officer to see if you qualify for an income-based repayment plan. These plans can reduce your monthly payment, sometimes as low as $0 per month, depending on your adjusted gross income and family size.
- Ask about the difficulty options. If you face a sudden loss of income or are unable to make payments on time for an extended period, ask your loan servicer about options for deferment or forbearance in the event of hardship. . Typically, interest continues to accrue during this time, but you can temporarily suspend your payments until your finances stabilize.
- Request reimbursement of administrative compensation. If you are having difficulty and your tax refund or other funds have been withheld, you may be eligible for a refund for recoveries that occurred after March 13, 2020. For more information, contact the Dispute Resolution Group. defaults from the Ministry of Education online or at 1-800-621-3115.
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