Student Loan Tax Offset: All there is to Know and How to avoid it

Every year, most people keep looking forward to tax refunds. A refund means that you overpaid your taxes throughout the year, usually as a result of setting up your withholding. To offset the overpayment, the IRS sends a refund.

Nevertheless, if your federal student loans are in default, the Education Department may refer your debt to the Treasury Department for recovery by offsetting your federal (and sometimes state) tax returns.  The Treasury Department will withhold all of your refund to cover the debt owed.

One of the consequences of falling back on repayment of your federal student loan is that you may not get a refund of tax. If you have filed a joint return, the IRS can and will withhold the refund from your spouse, even though your spouse may be entitled to the refund offset in whole or in part.

Frequently Asked Questions About Student Loan Tax Offset

How To Know If Your Taxes Will Be Offset

Generally speaking, if you have defaulted student loans assigned to a collection agency, the IRS is likely to withhold your taxes to pay off a portion of your debt.

The law states the suggested remedy must be offered by the IRS and the ability for you to check your loan records.  You will receive this notification by mail at the best address the IRS will find for you.

If you never receive this letter, there is no reason to challenge the tax offset, although for other reasons, as you will see below, you can challenge the offset.

When can the government garnish my refund over student loans?

Once any federal debt goes into default, including student loans, the government can garnish your tax refund. If you are more than 270 days late on repayments, your loans are in default. The government can withhold part or all of your refund depending on how much you owe and the size of your refund.

If you’re late on private student loans, the government won’t garnish your tax refund— though you may face other repercussions such as losing your loans and harming your personal credit.

How do I know if I have a tax refund offset for student loans?

The Treasury Department’s Bureau of the Fiscal Service (BFS) will send you a notice of offset at least 65 days before your taxes are due — usually in the fall. The notice should tell you:

• Your original tax refund amount.
• How much it’s withholding.
• The agency that’s receiving the offset.
• The agency’s contact information.

How can I stop the government from taking my taxes due to student loans?

Once you receive a notice of offset, you have 65 days to request a review of your account. You might be able to successfully challenge your tax offset if:

• You already repaid your student loans.
• You’re currently making repayments based on a repayment agreement.
• They’re someone else’s loans mistakenly under your name.
• You’re currently going through bankruptcy proceedings.
• Your loans were discharged during bankruptcy.
• Your loans are eligible for discharge due to death, disability, school closure, identity theft or your school not following federal law when issuing your loans.
• You’re facing financial hardship.

You can challenge your tax offset by submitting the Treasury Offset Request for Review form or contacting the BFS’s call center at 800-304-3107. Customer service is available on weekdays from 7:30 a.m. to 5 p.m. CT.

You also might want to reach out to your student loan servicer to learn about the procedure for disputing your garnishment — especially if you’re facing financial hardship.

How to fill out the tax offset hardship refund request form

If you believe you’re eligible for an exemption from a tax offset due to financial hardship, reach out to your servicer to request a form to complete and submit. You might be eligible for an exemption if:

• You ran out of unemployment benefits. Submit a notice showing that you’re no longer eligible for unemployment benefits, despite not having a job.
• You’re facing foreclosure. Submit a notice issued by a court in the past three months that states how much you owe.
• You’re facing eviction. Submit an eviction notice in the past three months from your rental agency or the mortgage holder of your building that’s signed by an official and states how much you owe.
• Your utilities have been shut off. Submit a notice from your utility company in the past three months that states your utilities have been disconnected or shut off and how much you owe.
• You’re homeless. Your servicer might ask you to provide a temporary address to get in touch with you until you have permanent contact information available.

Basically, you just have to provide your contact information, Social Security number and check off which type of exemption you qualify for. Once you have signed and dated the request, follow your servicer’s instructions to submit the form and all relevant documents either by mail, fax or email.

Sometimes, it could take up to 30 days for your servicer to process your request. If approved, you still might not get your full refund, depending on the specifics of your financial situation. You can only get approved for a tax offset hardship refund once.

What About My Spouses Tax Refund?

Any federal tax refunds payable to a couple who are jointly filing their taxes are also subject to a tax offset irrespective of whether that debt is owed by only one person.  This means you will also withhold tax refund from your spouse if your loans are in default.

Once the tax offset occurs, the partner may file with the IRS a petition for “injured spouse” to recover their part of the offset that was withheld.  In order to be considered a spouse injured, you must:

• Have paid federal income taxes, or claimed a refundable tax credit.

• Have filed a joint return, and you’re not responsible for the debt that created the offset

6 Ways to Avoid a Student Loan Tax Offset

If you think you might be in danger of falling behind on your federal student loan repayments, there are several steps you can take to prevent tax refund garnishment.

1. Stay on top of repayments

Making sure you repay your student loans on time is key to avoiding default, and therefore a tax offset. You can make this easier by signing up for autopay through your servicer — typically this comes with a 0.25% interest rate discount.

You also might want to consider making a budget for yourself if you’re having trouble coming up with the funds when they’re due.

2. Stay in touch with your servicer

Your servicer is the company that handles student loan repayments. It might have ideas for how you can stay current on your student loans that you wouldn’t have found on your own.

If you’re struggling with repayments — or think you might in the future — reach out to customer service to find out what your options are.

3. Apply for deferment or forbearance

Temporarily short on funds? Federal loans come with several options to put your student loans on hold to avoid default. It’s a helpful option if you’re going back to school, recently lost a job, are going on active military duty or are going through a short-term period where money is tight.

4. Switch repayment plans

Struggling with repayments with no end in sight? Consider changing your repayment plan. Federal student loans come with several different options, including a few income-driven repayment plans based on how much you make to ensure your repayments are something you can afford.

5. Consider consolidation

Already defaulted? You can wipe the slate clean by applying for a federal Direct Consolidation Loan. This involves taking out a new student loan to pay off your current loans, including those you’ve defaulted on. You’ll get to choose a new repayment plan, servicer and get an interest rate that’s a weighted average of the rates you already have.

6. Get student loan rehabilitation

Another way to get out of default is to apply for student loan rehabilitation. Rehabilitation involves agreeing to make nine repayments over 10 months that are no more than 20 days late. How much you pay depends on your income.

You can get started on rehabilitating your federal student loans by reaching out to your servicer.

Bottom line

Student Loan Tax Offset is a repercussion of defaulting on your student loans is losing your tax refund. But there are various ways of getting some or all of the refund back if you’re facing some financial challenges.

And if you stay on top of your loans, there are steps you can take to prevent the BFS from sending that tax offset notice in the first place.