When you consolidate your student loans, you are combining multiple loans you received over multiple years into one loan. If you consolidate your defaulted student loan after a tax refund offset, the U.S. Department of Education will apply the amount of your tax refund offset to any one of your outstanding loan balances.

Student Loan Defaults

Federal student loan defaults can result in some of the most severe consequences of any type of credit default. The U.S. Department of Education can intercept your federal tax refund checks, garnish your wages, including regular Social Security benefits, and place a lien on your bank accounts. Defaulting on a federal student loan prohibits you from obtaining additional federal financial aid or a loan insured by the federal government such as a Federal Housing Administration-insured mortgage.

Tax Refund Offsets and Garnishment

A tax refund offset is one remedy the Department of Education uses to collect on unpaid federal student loans. Private creditors must file a civil suit against you before they can pursue a state tax refund offset; private creditors may not offset your federal tax refund. Both state and federal tax refund checks are subject to offset for federal debts, such as those for federal student loans from the Department of Education. The department can also garnish your wages to collect on your defaulted student loans without filing suit.

Consolidation After Default

If you consolidated your student loan after the department had your tax refund offset, you are not entitled to receive that portion of the refund back; instead it is applied to your outstanding loan balance. Once you enter into a consolidation program with the department and make three on-time payments, your loan will be current and no longer in default. Once your loan is current, the department will not submit an Administrative Wage Garnishment order to your employer to garnish your wages or pursue tax refund offsets to pay toward your student loan debt.

Statutes of Limitation

No statutes of limitation apply to the collection of defaulted federal student loans. This means that should you default on your federal student loans after you consolidate and bring them out of default, the department can again offset your tax refund until your debt is repaid in full.

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