Can my tax refund be garnished for late student loan payments?

Income tax refunds normally can be garnished for unpaid federal student loan debt. But this year, the rules are different. (iStock)

The coronavirus pandemic has left many individuals unable to repay their federal student loans. Fortunately, the federal government temporarily shielded loan borrowers from the consequences of unpaid debt. The Biden Administration has taken steps to help student loan borrowers include setting interest to 0%, pausing loan payments, and stopping collection activity — including the seizure of tax refunds.

While these reforms to student loans have provided a temporary reprieve, they apply only to federal student loans. And if you’re struggling with them, it’s a good idea to plan ahead and look for a long-term repayment plan solution for when monthly payments resume.

If you have private student loans, these are treated very differently from federal student loans. Your tax refund isn’t ever garnished due to unpaid private loan debt. However, private student loans won’t be forgiven by government reforms, and creditors can pursue other collection action.

Refinancing private student loans could be the answer to make monthly payments more affordable, especially as rates for refinancing have never been lower. Use an online tool such as Credible to compare student loan refinancing rates from multiple lenders at once without affecting your credit score.  This can help you see if refinancing is right for you.

HOW TO KNOW IF YOU QUALIFY FOR A STUDENT LOAN TAX DEDUCTION

Can my tax refund be garnished for late student loan payments?

Ordinarily, the Treasury Offset Program enables the IRS to garnish your tax refund if you have unpaid student loan debt. This means the agency could take your tax refund before it ever hits your bank account.

While you may have options to avoid this, such as by entering a repayment agreement with the lender or proving the offset would cause extreme financial hardship, there’s a good chance your tax refund will be taken in normal years if you’ve fallen into default on your student loan debt.

The good news is, that won’t happen in 2021. President Joe Biden directed that the Department of Education extend the pause payments on federal loans temporarily, to reduce interest to 0%, and to pause collection efforts. Seizure of a tax refund is a collection effort, so the IRS won’t be taking anyone’s refunds this year even if they have unpaid federal student debt.

Tax refund garnishment doesn’t apply to private student loans, though, either this year or in normal years. While you do have to worry about other potential collections efforts if you default, you don’t have to be concerned that your creditors can just seize your tax money. Creditors can pursue other collection action, though, potentially including wage garnishment.

To see if private student loan refinancing is right for you, view this rates table that compares rates from multiple lenders at once.

HOW YOUR TAX REFUND CAN IMPROVE YOUR CREDIT

How can you avoid income tax refund garnishment?

For 2021, you won’t have to do anything to avoid having your tax refund garnished because of unpaid student loan debt. But garnishment will likely be back next year once the pandemic is over. During this period when loan payments are paused, explore options for making federal loans more affordable in the future.

There are a number of payment options, such as income-driven repayment, that could ensure you don’t default on your student loan debt. You could also be eligible to pause loan payments through deferment or forbearance. Refinancing federal loans isn’t a good solution, though, as you would need to refinance with a private lender and give up all the benefits federal student loans offer.

With federal payments paused and the interest rate set at 0%, it especially doesn’t make sense to consider refinancing federal loans now. Instead, take advantage of the moratorium on payments to work with your lender so your loans don’t become a financial problem once payments resume.

You can use Credible to compare student loan refinancing rates from multiple lenders at once without affecting your credit score.

IS STUDENT LOAN INTEREST TAX DEDUCTIBLE?

What should you do about private student loans?

Unlike with federal student loans, the government likely won’t be able to do much in the future to forgive privately held debt.

Refinancing could be your best option with private student loans because you won’t have to give up any borrower benefits. If you can reduce your rate, which many people can, you can make payments much cheaper. Use an online student loan calculator to get a better sense of how much your loan payments could be if you refinance.

To learn more about how private student loan refinancing could help you, visit Credible today to get personalized rates from multiple lenders with no impact on your credit score. You may just find refinancing can save you a lot of money, so you won’t have to worry about falling behind on the bills.

Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.

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