When Can a Tax Refund Be Seized to Pay Student Loans?

Your tax refund can be taken to collect defaulted student loans.
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Student loans that are guaranteed by a state government student loan agency or by the U.S. Department of Education are subject to strong and comprehensive collection actions if they are not repaid. One of the strongest and most common collection tactics is to seize your income tax refund directly from the Internal Revenue Service. However, certain regulations and procedures must be followed for this to happen.

Delinquency and Default

Your student loan account is technically delinquent immediately after you miss making a scheduled payment on time. The servicing agency you make your payments to will report your delinquency to credit agencies after 90 days of being delinquent. However, seizing your tax refund is only allowed after your student loan is officially declared to be in default, not just delinquent. Federal law allows a default to be declared after you are in a delinquency status for 270 days or more.

Legal Procedural Requirements

The law requires that the student loan servicing agency must use full due diligence to try to collect payments from you while your loan is still delinquent, prior to any action to declare your loan in default. The agency must make repeated attempts to contact and inform you of the delinquency and to collect the late payments. If this is unsuccessful, the agency can declare your loan as defaulted and also exercise the loan acceleration clause, which makes the full loan balance due and payable, not just the missed payments.

Treasury Offset Program

Once your loan is officially declared to be in default, your student loan debt can be referred to the U.S. Treasury Offset Program for collection action. You must be sent in advance an official notice informing you that your tax refund is going to be subject to offset, an advance seizure, and the details of the student loan debt involved. You have a right to challenge the offset within 65 days of this notice. If the offset goes into effect, TOP will seize any refunds directly from the IRS up to the amount of the student loan debt, including earned income and other tax credit amounts.

Other Considerations

The collection action by TOP is ongoing and will be applied repeatedly until the loan balance is paid or you have the collection action halted. You can halt the TOP collection if you make and keep satisfactory payment arrangements with the loan agency or if you are in an active bankruptcy. Making and keeping such payments can also allow you to regain student aid privileges again. Some states have their own separate state tax refund offset programs. TOP can also seize other government payments to you, including Social Security benefits.

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