Student Loan Default: Tax Refund Seizure Pause Announced

For millions of Americans behind on student-loan payments, the annual tax refund is a financial lifeline. However, a recent policy shift by the federal government has created a temporary but vital opportunity to protect those funds from seizure.

The Department of Education has announced a temporary pause on two aggressive collection tactics: wage garnishment and the Treasury Offset Program. This program allows the government to intercept federal tax refunds to cover defaulted student loans. The pause is designed to give struggling borrowers breathing room to navigate their options before the tax filing season begins in earnest.

This development comes after collections on defaulted loans resumed in May 2025, following a five-year hiatus. With the pause now in effect, borrowers have a narrow but crucial window to take control of their financial future.

The Department of Education's announcement on January 16 marks a significant, albeit temporary, change in federal collection policy. Previously, borrowers who defaulted on federal student loans—defined as missing payments for more than 270 days—were subject to immediate consequences. These included the garnishment of wages and the interception of tax refunds through the Treasury Offset Program.

The resumption of these collection activities in May 2025, under the previous administration, placed over 5 million borrowers at risk. Without the current pause, the government could have begun seizing refunds immediately after borrowers filed their taxes, leaving them with little recourse.

The temporary halt is not a cancellation of debt but a strategic pause. It provides a window for borrowers to assess their situation and take proactive steps to return their loans to good standing before their financial assets are at risk.

"Once you've already filed your taxes, that process is underway. It is going to be nearly impossible to get your loans out of default before your refund would go out."

The significance of this pause cannot be overstated for those living paycheck to paycheck. For many, a tax refund is not a bonus but a critical component of their annual budget, used to cover essential expenses like rent, car repairs, or medical bills.

Abby Shafroth, managing director of advocacy at the National Consumer Law Center, emphasized the real-world impact. She noted that once a refund is seized, it is "very, very unusual" to recover it. This makes the period before filing taxes the most critical moment for borrowers to act.

Advocacy groups, including the National Consumer Law Center and Protect Borrowers, had issued warnings prior to the Department's announcement. They urged borrowers to verify their default status to prevent the automatic seizure of their refunds. The government is required to send notices of default, but these are typically sent once via physical mail and can be easily missed.

• Over 5 million borrowers are currently in default.
• Default typically occurs after 270 days of missed payments.
• Seizure of tax refunds is a primary consequence of default.
• Physical mail notices can be easy to overlook.

Borrowers who suspect they may be in default should take immediate action. The first step is to confirm their status. Advocacy groups suggest calling the Treasury Department's Treasury Offset Program Call Center at 1-800-304-3107 to check if they are on the list for refund seizure.

If a borrower is in default, they have several pathways to resolve the issue:

1. Loan Rehabilitation: This process requires contacting the loan servicer and signing an agreement to make nine payments within 20 days of each due date over ten consecutive months. While time-consuming, this option removes the default status from the borrower's credit report.
2. Loan Consolidation: This is a faster option than rehabilitation. A borrower can apply to consolidate their defaulted loans into a federal direct loan. However, this does not remove the default status from their credit history. The new loan can then be paid under an income-driven repayment plan.
3. Loan Cancellation: In specific cases, a borrower might be eligible for loan cancellation. This applies to those who qualify for programs such as the closed school discharge, which benefits borrowers whose schools closed before they completed their programs.

For those on the default list, requesting an extension to file taxes can provide the necessary time to explore these options and return to good standing.

Returning to good standing is the ultimate goal for any borrower in default. The process, while challenging, offers a clear route out of financial distress. The choice between rehabilitation and consolidation depends on the borrower's priorities: credit repair versus speed.

Rehabilitation offers the significant benefit of removing the default from a credit report, which can improve a borrower's financial standing for future loans or credit applications. Consolidation, while quicker, leaves the default on the record but immediately stops collection efforts and allows for repayment under a manageable plan.

The temporary pause on wage garnishment and tax refund seizure is a window of opportunity. It allows borrowers to make these critical decisions without the immediate pressure of losing their income or tax refunds. As Shafroth noted, protecting the refund is essential for many working people to make ends meet.

"A lot of working people depend on their tax refund to make ends meet, to get caught up on rent, to pay for necessary car repairs or expenses. So that tax refund isn't a bonus for most people. It's really built into their annual budget, and it's important to protect."

The temporary pause on student loan collections is a reprieve, but it is not permanent. Borrowers must use this time wisely to assess their situation and take decisive action. The window to file taxes is approaching, and with it, the deadline to protect one's refund.

By verifying their status and exploring options like rehabilitation or consolidation, borrowers can navigate their way out of default and back to financial stability. The key is proactive engagement. Waiting until after filing taxes could mean losing a critical financial resource for the year.

For millions, this pause is more than a policy change—it is a chance to reset their financial trajectory and protect the funds they depend on to live.