Student Loan Borrowers in Default Can Keep Their Tax Refunds—For Now
Student loan borrowers who are in default just got some good news when it comes to debt collection, at least temporarily.
The U.S. Department of Education announced Friday, January 16, that it will delay implementing involuntary collections on federal student loans, including administrative wage garnishment and the Treasury Offset Program.
It's unclear how long the temporary delay will last. More details are likely coming.
For now, it might ease some worries about losing your tax refund to debt collection as the 2026 tax season approaches.
Why This Matters
This tax season is expected to deliver sizable refunds to many people, which could drive consumer spending and keep the economy moving. But millions of student loan borrowers in default risked seeing their wages garnished and tax refunds seized as the long forbearance program that started during COVID wound down and debt collection resumed.
The change comes after advocacy groups turned up the heat, including an urgent letter sent in January to the Education Department calling for a delay to avoid what they called "an unprecedented default crisis."
Aissa Canchola Bañez, policy director at Protect Borrowers, said in a statement Friday that the Trump administration's earlier plan would have been "economically reckless and would have risked pushing nearly 9 million defaulted borrowers even further into debt."
"After months of pressure and countless horror stories from borrowers, the Trump administration says it has abandoned plans to snatch working people's hard-earned money directly from their paychecks and tax refunds simply for falling behind on their student loans," said Canchola Bañez of Protect Borrowers, a nonprofit advocacy organization.
The National Consumer Law Center said Friday's announcement "throws a lifeline to working and middle class families."
The Problem with Current Policies
Abby Shafroth, managing director of advocacy at the National Consumer Law Center, said student loan borrowers are "buckling under the weight of outdated student loan policies that don't reflect today's high cost of living and affordability crisis."
Existing policies and protections were set decades ago and haven't been updated to reflect how much money people actually need to live on, given how much prices and the cost of living have increased.
For example, the Education Department protects only the first $217.50 per week in wages from garnishment—an amount set in 2009. Similarly, it protects only the first $750 per month of Social Security benefits from seizure, a protection set in 1996. This summer, the Education Department paused a plan to resume garnishing Social Security benefits.
Without reform, Shafroth said, "turning on collection, largely paused since 2020, would therefore put working families and older adults who fall behind on student loans at risk of being pushed into poverty by the federal government."
What's Coming Next
The temporary delay gives the Education Department more time to implement major student loan repayment reforms under the Working Families Tax Cuts Act, which passed last year. That should give borrowers more options to repay their loans and avoid debt collection.
The changes include simplifying repayment options and giving borrowers another shot at rehabilitating their federal student loans.
The Working Families Act "reduces the number of federal student loan repayment plans, eliminating a confusing maze of options and making it easier for borrowers to select either a single standard repayment plan or income-driven repayment plan that best meets their needs," according to the Education Department.
A new income-driven repayment plan waives unpaid interest for borrowers with on-time payments whose payments don't fully cover accrued interest. The plan will be available starting July 1, 2026.
Under the act, borrowers now get a second chance to rehabilitate a defaulted loan, letting them get repayments back on track and pull the loan out of default. Before the act passed, borrowers only got one shot at rehabilitation.
During the delay, the Education Department is encouraging borrowers in default to explore their options for resolving defaulted student loans with their servicer.
The department is still reporting student loan defaults to credit reporting agencies, which may hurt borrower credit reports.
By the Numbers
Mark Kantrowitz, a student loan expert and author, noted that federal income tax refunds were last offset for defaulted federal student loans in 2019, before the pandemic. About 1.4 million federal income tax refunds were offset then—roughly 15.2% of the total number of defaulted borrowers.
The CARES Act, passed by Congress on March 25, 2020, suspended enforced collections for the duration of the payment pause, and there were further extensions.
Kantrowitz estimates that almost 11 million borrowers will be in default by the end of March 2026. By his estimate, some 1.6 million borrowers likely would have had their federal income tax refunds offset. "But, it could be more," he said.
"The federal government usually offsets the full income tax refund amount," Kantrowitz said. "The only exception is when less than the full amount is needed to satisfy the defaulted federal student loan debt."
So, borrowers in default get to keep their tax refunds for now. How long "for now" lasts remains to be seen.
Did you find this information useful? Feel free to bookmark or to post to your timeline to share with your friends.