Student Loan Tax Offset: You graduated from college and you work, but you don’t make enough money. Paying rent, car payments, and other charges, including student loans, can be tough.
Every little bit helps in such a situation, like tax refunds. You may be looking forward to paying down debt or keeping up to date on important bills with a refund. But if your federal student loans are in default because you haven’t made payments, it might take away your tax refund.
The student loan tax offset hardship refund offers you a chance to keep your money or get it back if it’s been garnished. There are only a few ways you can qualify to pocket that much-needed student loan tax offset hardship refund in 2020.
If you’re overwhelmed by the burden of student loans, it can be easy to shove the subject to the back of your mind. Perhaps you’re not repaying your debt at all. If you don’t make a payment for 270 days, or about nine months, then you’re considered to be in default on your student loans.
Federal student loan borrowers are defaulting on their student loans at a slightly higher rate. According to the most recent data from the U.S. Department of Education, 11.5% of borrowers who entered repayment in the 2013-2014 fiscal year defaulted on their student loans, up slightly from 11.3% the year before.
Defaults can happen for a number of reasons. The issue is borrowers can’t afford to make payments, whether it’s because they aren’t earning enough money, are paying other important bills, or otherwise.
When you default on your loans, your wages can be garnished, which means the Department of Education can take money directly out of your paycheck. It also can work with the Internal Revenue Service (IRS) to use your tax refund to repay your defaulted student loans, which is known as a “tax refund offset.”
In a student loan tax refund offset, the Department of Education and the IRS work together and look for your name and taxpayer identification number in both department databases. If there’s a match, federal payments like tax refunds will be offset to settle any outstanding debt. That’s how your tax refund can be taken to pay your delinquent student loans.
“For many people, an offset is a terrible situation,” said Stanley Tate, a student loan attorney in St. Louis. “People depend on their refund to catch up on bills, rent, life. They plan for that money. To lose it, after you’ve already budgeted it in your mind, is terrible.”
If your tax refund was garnished because you defaulted on your student loans and you’re in financial hardship because of it, you might be able to get it back. The student loan tax offset hardship refund process can return your tax refund or stop it from being taken away.
How to Qualify For the Student Loan Tax Offset Hardship Refund
You can request an offset refund whether your tax refund has been taken from you or not, Tate said. There isn’t a time limit on making the request, but he suggests moving as quickly as possible. There are some limitations, however.
“Your living expenses, income, [and] medical bills don’t appear to count as an extreme financial hardship,” according to Tate. He said there are many situations in which you can get back the tax refund. Here are a few examples:
You’ve filed for bankruptcy and the case is still open, or the student loan was discharged in bankruptcy.
You’ve repaid the loan.
Someone else’s loan shows up under your name because the Social Security number attached was incorrect.
You’ve entered into a repayment agreement with the Department of Education and have started making payments as required.
You’re totally and permanently disabled.
The loan isn’t enforceable.
If you fit the bill, you’ll need to complete a student loan tax offset hardship refund form and provide proof of your hardship. You also can contact the Treasury Offset Program at 800-304-3107 for more information.
Financial hardship can impact anyone. But there are steps you can take to avoid a tax offset.
1. Stay out of student loan default
It takes nine months of nonpayment on federal student loans before default status kicks in. Making minimum payments on time is the most important thing you can do to stay out of default. Tate suggested waiting to file your tax return until you’re no longer in default to avoid being hit with an offset.
2. Consider deferment or forbearance
Paying your loans on time is the most important way to avoid an offset, but you might not always be able to do so. If you know you can’t make minimum payments on time, try deferring your loans. When your loans are deferred, you can postpone payments for up to three years.
You also can consider another federal repayment option: forbearance, which is similar to deferment but has different eligibility rules. Forbearance pauses your loan payments for up to one year. Keep in mind that interest continues to add up during the forbearance period.
Depending on your loans, interest also can accrue if you’re in deferment, so do your research.
3. Consolidate or refinance your student loans
Another way of avoiding default is to consolidate or refinance your student loans, Tate suggested. Both options can help you keep your loan payments low and will move you to one payment, rather than multiple payments, per month. Depending on your loans, you could qualify for low interest rates through refinancing.
If you have federal student loans, however, you should check to see if you’ll lose any federal protections by refinancing with a private lender.
FAQ About Tax Refund Offset
1. What Is a Tax Refund Offset?
If you default on a student loan, the Department of Education can use several different methods to collect student loans. In one of those, called a tax refund offset, it refers the debt to the U. S. Treasury Department for collection. The Treasury Department then applies any tax refunds due to you to the payment of the student loan debt.
2. Who Can Initiate the Action?
The Department of Education initiates the referral to the Treasury Department. The Department of Education can do this for:
loans due to the Department of Education
A loan guaranteed by the Department of Education, or
loans due to private lenders or guarantors who have requested assistance from the Department of Education.
3. Will I Receive Notice That My Refund Is Being Offset?
Under federal law, you must be given advance notice of the proposed offset. The notice will advise you of the proposed offset, including the nature and the amount of the outstanding debt. The notice must also advise you of your right to:
inspect and copy records relating to the debt
obtain a review of the loan obligation if you do not agree that you owe the amount claimed, and
enter into a written agreement to pay the debt you do owe.
4. How Long Does It Take To Get Tax Refund after Offset
There’s no time limit on getting the refund back to you. Having said that, in some, if your extreme hardship request is approved, it takes about 3 to 4 weeks before the refund is returned to you.
5. How Does a Tax Refund Offset Process Works
You’re supposed to get notice before your refund is taken to let you know that your refund will be taken if you don’t enter into a repayment agreement. I say supposed to get notice because this doesn’t always happen.
Often, the notice is sent to the last address the Department of Education has on file for you. In some cases, this means the notice is sent to an address you haven’t lived at in years.
But let’s say you did get the notice. What happens then? The notice you should tell you a few things:
How much you owe in federal loans
Your right to inspect and copy the loan records (loan balance, forbearance/deferment request, etc.)
Your right to enter into a written repayment agreement
It can be easy to put off paying your student loans, especially when you have other pressing bills. But doing so can put a huge damper on your finances and your credit report, especially if you end up defaulting.
Do your best to avoid defaulting on your student loans and ending up in a tax offset situation. Getting your money back through a Student Loan Tax Offset Hardship Refund in 2020 might be difficult, depending on your circumstances.
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