Most creditors can't intercept your federal tax refund and apply it towards an outstanding debt, but there are a few, such as Sallie Mae, that can. Through the Treasury Offset Program, payments you receive from the federal government can be taken to pay off certain student loans and a limited number of other debts. But having an outstanding loan with Sallie Mae doesn't necessarily mean you won't receive your tax refund.
TL;DR (Too Long; Didn't Read)
It is possible to have your federal tax refund intercepted in order to pay off your Sallie Mae loans.
Sallie Mae Federal Loans
Only creditors of student loans that are guaranteed, or insured, by the federal government are eligible to obtain your tax refund through the Treasury Offset Program, regardless of whether it's Sallie Mae or a different company that services the loan. But owing money to Sallie Mae, even if it's for past-due loan payments, won't prevent you from receiving a tax refund — your loan must be in default before Sallie Mae can take it. Therefore, unless you default on a Direct PLUS, Subsidized or Unsubsidized student loan, your refund is safe from Sallie Mae.
Sallie Mae Private Loans
Sallie Mae offers a number of private loans to students who need additional funds to pay for school. If you take out this type of loan and fall behind on your payments or go into default, Sallie Mae still can't access your tax refund, since it isn't eligible to participate in the Treasury Offset Program to collect on private loans. Alternative methods, such as obtaining a court judgment to place liens on your property, garnish your wages and freeze your bank account, are available to Sallie Mae to collect unpaid private student loan debt. Therefore, if you deposit the tax refund into your bank account and you aren't aware that there's a judgment against you, the refund may be within Sallie Mae's reach if it decides to freeze your accounts.
Whenever a creditor is successful in claiming a tax refund, the law requires that you receive notice of it. The Bureau of Fiscal Service, or BFS, — an office within the Treasury Department — will mail a notice to your home advising you that Sallie Mae has, or will be, receiving your income tax refund. The notice will state the amount of your tax refund and how much of it is being used to pay down the student loan, and will provide you with Sallie Mae's address and phone number. If you disagree with anything stated in the notice or didn't receive one, you can contact the BFS at 800-304-3107. But if you're disputing the debt or the amount you owe isn't correct, you can contact Sallie Mae directly.
Refunds Remaining after Offset
If your tax refund is for more than you owe Sallie Mae on the defaulted loan, you'll receive the excess funds in a paper check or through direct deposit if you entered the necessary account information on your return. The remaining funds, however, may be used to pay off other debts you have with the federal government, unpaid state and local income taxes, past-due child support and any unemployment compensation you received that you have to return to a government agency.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.