Student loan borrowers who are in default can now retain their tax refunds

Relief for Student Loan Borrowers in Default

Individuals with federal student loans in default have received encouraging news regarding debt collection efforts.

The U.S. Department of Education announced on January 16 that it will postpone the start of involuntary collection actions on federal student loans. This includes delaying both wage garnishments and the Treasury Offset Program, which can seize tax refunds.

While the Department has not specified how long this pause will last, more information is expected in the near future. For now, the temporary halt may ease concerns for those worried about losing their tax refunds as the 2026 tax season approaches.

This year’s tax season is anticipated to bring substantial refunds to many Americans, potentially boosting consumer spending and supporting economic growth.

However, millions of borrowers in default faced the risk of having their wages garnished or tax refunds withheld as pandemic-era forbearance measures wind down and collection activities resume.

Advocacy Groups Influence Policy Change

This decision follows significant advocacy from various groups, including a recent urgent appeal to the Education Department to prevent what they described as a looming "default crisis."

Aissa Canchola Bañez, policy director at Protect Borrowers, stated that the previous administration’s plan would have been "economically reckless," potentially pushing nearly 9 million borrowers deeper into debt.

The National Consumer Law Center welcomed the announcement, describing it as a vital support for working and middle-class families.

Abby Shafroth, advocacy director at the National Consumer Law Center, emphasized that borrowers are struggling under outdated student loan regulations that fail to reflect today’s high living costs.

She pointed out that protections for borrowers—such as exempting only the first $217.50 per week from wage garnishment—were set in 2009 and have not been updated to match current economic realities.

Outdated Protections and the Need for Reform

Similarly, only the first $750 per month of Social Security benefits is shielded from seizure, a threshold established in 1996. The Education Department recently paused plans to resume garnishing Social Security benefits.

Shafroth warned that without updates, resuming collections—largely suspended since 2020—could push struggling families and seniors into poverty.

She advocated for reforms that would increase the amount of income protected for essential living expenses, reflecting today’s higher costs.

Upcoming Changes and Borrower Options

The Department of Education explained that this temporary delay allows time to implement significant repayment reforms under the Working Families Tax Cuts Act, which was enacted last year.

These changes are designed to provide borrowers with more manageable repayment options and a renewed opportunity to rehabilitate their defaulted loans.

• Simplified repayment choices
• An additional chance to bring defaulted loans back into good standing
• Fewer, clearer repayment plans to reduce confusion

A new income-driven repayment plan will also forgive unpaid interest for borrowers who make timely payments, even if those payments do not cover all accrued interest. In some cases, the Department will make small matching payments to help reduce the principal balance each month.

This new repayment plan will be available starting July 1, 2026.

The pause in collections gives defaulted borrowers extra time to review these new options after consolidating their loans or completing a repayment or rehabilitation agreement. Previously, borrowers had only one opportunity to rehabilitate a defaulted loan; now, a second chance is available.

During this period, the Department encourages those in default to contact their loan servicer to explore solutions for resolving their debt.

It’s important to note that the Department will continue to report defaults to credit bureaus, which could negatively affect credit scores.

Impact on Tax Refunds and Borrowers

Student loan expert Mark Kantrowitz noted that the last time federal income tax refunds were offset for defaulted loans was in 2019, before the pandemic. At that time, about 1.4 million refunds were seized, representing roughly 15% of all defaulted borrowers.

The CARES Act, passed in March 2020, suspended enforced collections during the payment pause, with several extensions since then.

Kantrowitz estimates that by March 2026, nearly 11 million borrowers could be in default, with approximately 1.6 million at risk of having their tax refunds offset—though the actual number could be higher. Typically, the government seizes the full refund amount unless a smaller sum is needed to cover the debt.