Defaulting on your student loan can lead to wage garnishment, which can severely cut into your income. A student loan wage garnishment and taxes connected to this, all of which will be connected to a percentage of your disposable income, are taken from your paycheck after taxes. You'll still use your gross pay when filing and paying your income taxes. In a sense, it's just like making a voluntary student loan payment, as you do not receive any special tax deductions or credits for the amount garnished from your earnings.
Claiming Taxable Income
You file and pay taxes based on your taxable income, which is your gross income less applicable tax deductions, credits and allowances. Your wage garnishment does not affect your gross pay, but can affect your net pay – the amount left after tax withholding, FICA taxes and other paycheck deductions.
The Department of Education can seize your tax refund until your student loans are paid off. However, you must be notified in advance of the intent to establish any tax offset. This notification also details your right to appeal the process if you think an error has been made. If you're married and the debt is yours alone, you may be able to stop your spouse's refund from being used for your defaulted loan.
You can't discharge a federal student loan through Chapter 7 bankruptcy, but you may be able to set up a monthly payment plan – less than the amount of your wage garnishment – with a Chapter 13 bankruptcy filing. You can also attempt to rehabilitate the loan by making nine on-time payments over a 10-month period. Contact your loan holder to determine your eligibility for this option.
Student Loan Interest Deductions
You may still qualify for student loan tax refund opportunities and interest deductions if your loan is in default status. You should receive a form from your loan servicer documenting the total interest you paid on the loan for the tax year. If you meet the other requirements, like using the money only for eligible education expenses, you can take the deduction. You can also claim this deduction for other school loans not in default.
Filing Your Return
You will continue to use your standard IRS Form 1040 in order to file your annual federal income tax report. Regardless of your wage garnishing, Form 1040 will act as the official report on your adjusted gross income and all student loan wage garnishment and taxes included within it.
- Internal Revenue Service: 1040EZ
- Internal Revenue Service: 1040
- Nolo.com: Student Loans - Getting Out of Default
- Internal Revenue: W-2
- Internal Revenue Service: Topic 456 - Student Loan Interest Deduction
- Classroom: How to File Taxes When Your Student Loan Is Being Garnished From Your Paycheck
- U.S. Dept. of Education. "Collections." Accessed April 2, 2020.
- FDIC. "Thinking of Co-signing a Student Loan? Know the Risks." Accessed April 2, 2020.
- CFPB. "What Is A Garnishment?" Accessed April 2, 2020.
- U.S. Dept. of Treasury. "Frequently Asked Questions about Administrative Wage Garnishment." Accessed April 2, 2020.
- U.S. Dept. of Education. "Student Loan Consolidation." Accessed April 2, 2020.
- Nelnet. "Postpone Your Payments with Deferment or Forbearance." Accessed April 2, 2020.
- U.S. Dept. of Education. "Understanding Delinquency and Default." Accessed April 2, 2020.
- U.S. Dept. of Education. "Getting Out of Default." Accessed April 2, 2020.
Chris Brantley began writing professionally for a financial analysis firm in 1997. From 2000 to 2004, he worked as a financial advisor, specializing in retirement planning and earned his Series 7, Series 66 and insurance licenses. Brantley started his full-time writing career in 2012 and has written for a variety of financial websites, including insurance, real estate, loan and investment sites. He holds a Bachelor of Arts in English from the University of Georgia.