Advertiser Disclosure

Didn’t Pay Back Your Student Loans? Tax Return Is Fair Game

Home > Taxes > Didn’t Pay Back Your Student Loans? Tax Return Is Fair Game

Josh Brooks’ annual tax return is between $500 and $700. It’s a good chunk of money he could use toward paying off his credit cards, motorcycle and living expenses.

Instead, his creditors have swooped in and snatched his tax return for the last three years because he failed to repay his $4,000 student loan.

“I was annoyed,” said 27-year-old Brooks about his tax return garnishment. “It wasn’t realistic that I’d be able to pay [the creditors] back in a reasonable amount of time because I was broke.”

While wage and tax return garnishment may seem like a distant threat if you pay your student loan bills on time, those extreme measures are increasingly becoming a reality for many Americans as the 37 million student loan borrowers across the nation face growing financial hardships.

Debt Grows During Hard Times

Brooks took out $4,000 in Stafford Loans to pursue an associate degree in graphic design at Orlando’s Valencia College in 2006. He juggled classes, homework and a job at a local coffee shop for three years, but the workload overwhelmed him. He dropped out of school.

“I couldn’t work and get hours in at the design lab,” Brooks said. “The lab was open during business hours and I had to work all the time to buy food.”

Although he didn’t receive his associate degree, Brooks completed a certification program in graphic design production and graphic design support in 2009. However, his debt continued to grow.

Brooks enrolled in a debt relief program with a debt consolidation company to make his loan payments more manageable, but that didn’t work out and he defaulted on his loans.

He switched jobs and put his plans to finish his degree and pay off his student loans on the back burner where they continued to simmer. It didn’t help that his car broke down and he purchased a motorcycle using his credit cards.

But his problems reached the boiling point when his manager ushered him into his office to say a student loan servicer called for information in an attempt to garnish Brooks’ wages. Since he didn’t meet the requirements for wage garnishment, the servicer instead decided to take his tax returns.

When asked what he would purchase if his refund was available to him, Brooks said, “Probably glasses, bike parts, contact lenses, a visit to the dentist or physical checkup at the doctor.” To him these expenses are luxuries, especially since his job does not offer health insurance.

Student Loan Default Is a National Dilemma

More than five million borrowers are in default, according to Bloomberg. As of September 2011, these borrowers owe $67 billion — just a portion of the total $1 trillion sum of all owed student debt.

A report by Education Sector, an independent education policy think tank in February 2012, shows that of all the students who take out loans for tuition, 30 percent drop out of school. That greatly increases the probability that they will default on their student loans.

Your loan is considered officially in default after 270 days without making a payment.

“We continue to be concerned about default rates and want to ensure that all borrowers have the tools to manage their debt,” U.S. Secretary of Education Arne Duncan said a 2012 Department of Education press release. “In addition to helping borrowers, we will also hold schools accountable for ensuring their students are not saddled with unmanageable student loan debt.”

Losing Your Hard-Earned Money to Wage, Tax Return Garnishment

After at least six months without receiving payments and no communication from borrowers, some creditors take the matter to court. Creditors are granted a Writ of Garnishment that is sent to a debtor’s employer.

For federal loans, a court order for wage garnishment is not necessary.

The Department of Education is authorized to seize up to 10 percent of disposable earnings to repay defaulted federal student loans. For private loans, up to 25 percent of disposable income may be garnished.

If your tax return is garnished, your lender will send you a notice that a claim has been filed against you.  The notice includes:

  • Your defaulted loan amount.
  • Your rights as a student loan borrower.
  • How you can avoid tax offset.
  • How to request documentation about your defaulted loan.
  • How you can request a hearing to object your offset.

Getting Back on Track

If addressing student debt has not been a priority in your life, now is the time to take steps to avoid having your wages garnished.

Whether you want to sign up a long-term repayment plan or consolidate your loans, taking the initiative to communicate with your lenders can help put you back in control.

Despite the tax return garnishment, Brooks says he’s on track to better financial standing. But he’s not sure how long it will take.

“I think things will get better once I find a higher paying job,” Brooks said. “It might take ten years, but hopefully less.”

About The Author

Alanna Ritchie

Alanna Ritchie is a content writer for, where she writes about personal finance and little smart ways to spend (and save) money. Alanna has an English degree from Rollins College.