If You Are Receiving a Tax Refund, Can it All Be Taken From You for a Student Loan?

Private lenders service non-federal student loans while the U.S. Department of Education services student loans insured through the federal student aid program. When you default on a federal student loan, the procedures to collect the unpaid loan amounts are different from when you default on a student loan from a private lender.

Private Lender Loans

When you default on a student loan through a private lender, the lender will often hire an attorney in your state to file a Request and Writ for Garnishment (Income Tax Refund/Credit). State treasury departments refer to these requests as offsets and each state has a Treasury Offset Program to process such requests. The creditor's lawyer files this request with your local county court and sends the request to you. The court then sends this request to your state's Treasury Offset Program.

Federal Student Loans

When you default on a federal student loan through the U.S. Department of Education, the department does not have to file a Request and Writ for Garnishment (Income Tax Refund/Credit) with any court. The department simply has to send you a notice that includes a detailed explanation of your debt and an explanation that they plan to offset your tax refunds. This notice will also include a contact number at the U.S. Department of Education's Administrative, which you can call to work out a payment arrangement and avoid a tax refund offset.

Offset Limits

Treasury Offset Programs can hold all or a portion of your state tax refund to pay your student loan debt. If the amount of your student loan debt is less than your state income tax refund, the state remits any remaining proceeds to you. The IRS can hold all or a portion of your federal tax refunds to pay student loan debt. The IRS sends you any amounts remaining from your federal income tax refunds after paying the debt. Private lenders cannot take your federal tax refund. Only federal student loans are subject to a federal income tax refund offset. The U.S. Department of Education can take both your federal and state income tax refunds.

Non-Responsible Spouse

If you file your taxes as married filing jointly and the student loan debt belongs only to you and not your spouse, your spouse can file an Injured Spouse Allocation form. This form allows you and your spouse to separate your income, taxes and deductions. This allows you to calculate the amount of the tax refund that is attributable to you and the amount attributable to your spouse. If the IRS or state Treasury Offset Program approves the Injured Spouse Allocation, they offset the portion of your joint federal and state tax refund that is attributable to you.