Next Tax Season, Millions of Student Loan Borrowers Face an Unpleasant Surprise

This piece is cross-posted here.

The federal student loan system is barreling towards a cliff. Millions of borrowers are expected to default on their debts this fall, with over four million severely behind on their payments as of June 30. Those borrowers are likely to join millions more who had entered default before the COVID pandemic—meaning that close to ten million Americans could be in default on their student loans by year’s end.

Borrowers will face consequences for defaulting immediately—such as a drop in their credit scores and loss of access to affordable, income-driven repayment (IDR) plans. But the worst financial shock for many will arrive early next year. When borrowers file their tax returns expecting a refund, or even an Earned Income Tax Credit (EITC) or Child Tax Credit (CTC), the U.S. Treasury will instead seize that check and apply the balance toward their defaulted loans.

In May, the Education Department resumed the Treasury Offset Program (TOP) after a long hiatus during the pandemic. Through TOP, the U.S. Treasury can intercept federal payments—including tax refunds and benefits—to borrowers in default on their student loans. In the past, TOP has been the government’s principal means of recovering defaulted loans, among other debt. In the year before the pandemic, the Treasury collected over $4 billion on behalf of the Department of Education through federal tax refunds alone.

The Education Department restarted TOP after most tax refunds went out during last year’s filing season, but the program will be up and running when those in default file their taxes next year. For millions, that may come as an unpleasant surprise.

Borrowers who were in default before the pandemic and retain that status today have not faced collections on their loans since 2020. They may have become disconnected from the student loan system or may be unable to access the tools needed to get out of default. The borrowers who will soon join them in default may also not know that student loan payments are due again after an almost-four-year moratorium—or due for the first time, for those who left school during the pandemic. Some may feel unable to afford their payments.

At any rate, in 2026, millions of borrowers could be subject to TOP withholding—perhaps the largest single collection action in the history of the student loan program, and one that may spill over into the larger economy.

The government’s goal should not be to collect borrowers’ loans through TOP—particularly if those borrowers are reliant on the EITC, a tax credit aimed at supporting low-income families. Involuntary collections should be the last resort for recovering student debt. Instead, the aim should be to help borrowers get out of default and voluntarily repay their debts, especially through IDR plans. These plans provide more affordable payments and help many borrowers avoid default in the first place.

The Education Department should make every effort to contact those in and on the verge of default and warn them that their tax refunds could be seized if they do not bring their loans back into good standing. Colleges should be pressed to spread this message, especially among their recent alumni. And community partners who engage with those in danger of default should be trained and encouraged to point borrowers toward assistance with repaying their loans. As the negative consequences of student loan nonpayment have been suspended for years, distributing such warnings and information at large scale will be critical for borrowers.

But information alone is not enough. Federal officials must also ensure they are prepared to serve millions of borrowers seeking pathways to exit default, including rehabilitating or consolidating their loans. The Education Department must ensure sufficient staffing at call centers to receive an influx of borrower inquiries without hours-long hold times. It should redouble efforts to address the backlog of applications for IDR plans, so lower-income borrowers can move onto a payment schedule quickly. As borrowers go through the process of exiting default, the Department and its contractors should ensure streamlined access to these plans—including existing options and eventually the Repayment Assistance Plan (RAP), a new creation of the Republican Congress which waives unpaid, accrued interest—both as attractive options and as tools to prevent default. (There are also opportunities to do so in an upcoming rulemaking.)

Though millions of student loan defaults this fall now look inevitable, for many, the most serious financial consequences will arrive during next year’s tax filing season. That means time is of the essence: Over the coming months, the government, its contractors, and stakeholders across higher education must all work to help borrowers return their loans to good standing and start making payments. After that, the damage to borrowers’ pocketbooks—and confidence in the student loan system—will be much harder to undo.