It’s tax time and you know what that means – refunds! While many people are planning how to spend their tax refunds, for some unlucky student loan borrowers, their refunds may never come.
Student loan borrowers who are in default and have overdue student loan payments may have their tax refunds garnished in order to recoup that debt. That’s right — the government will come find you and take your money if you have outstanding student loans in default.
Clearly, you can’t run away from your burdensome student loan payments. But there are ways you can avoid this undesirable situation and keep your tax refund to yourself, even if you’re struggling to make student loan payments.
Step 1: Pay your student loans on time
If you want to avoid having your tax refund taken for student loan payments, the key is to pay your student loans on time each and every month. It seems like obvious and simple advice, but keeping up with your payments will help you avoid the government’s wrath and won’t make you subject to tax refund garnishment.
Step 2: Contact your loan servicer if you’re having issues making payments
Tough times can happen to anyone; it can be hard to manage all of your financial responsibilities and your student loans when they do, especially if there’s nothing left over at the end of the month to put toward your payments.
If at any time you’re struggling to repay your student loans, contact your loan servicer to discuss your options.
If you have federal student loans, you may be eligible for an income-driven repayment plan that will lower your payments, even to zero dollars if you meet certain guidelines. In addition, you may want to consider deferment or forbearance so you can postpone your student loan payments until you’re back on your feet.
However, keep in mind you’ll probably end up paying more interest in the long run with these options — which may be worth it, in order to save you from a garnished tax refund and keep your loans in good standing.
“For anyone overdue on payments, the reality is … life has probably happened,” said Adam Carroll, Chief Education Officer at National Financial Educators and the creator of the student loan debt documentary Broke, Busted & Disgusted.
“The good news is that student loan servicers understand that these things happen, but they don’t know unless you make the call and figure out a solution,” he explained.
Step 3: Don’t wait, consolidate
If you’re a few days late on your student loan payment, they are technically overdue. But that doesn’t mean they’re in default yet.
The U.S. government only comes after student loan borrowers who are in default, which means they haven’t made any payments for a period of 270 days. While you may pay a late fee if you miss a payment, your loans only enter default after nine months of not making payments.
If you find yourself in that situation, one way to get out of student loan default is through a Direct Consolidation Loan. Consolidation involves paying off all of your existing student loans with a new, single loan. This also results in just one monthly payment to worry about, with one interest rate.
In order to be eligible for this option, you must make payments under an income-driven plan or make three consecutive payments on the loan before you apply for consolidation.
Working to get out of default ASAP can help you avoid your tax refund being garnished and put you back in good standing with your loans.
Step 4: Rehabilitate your loan
If your loans are in default and you want to avoid student loan tax refund garnishment, consider rehabilitating your loans to get them in good standing. The process of rehabilitation is a bit more complicated than consolidation, but can help you get out of default.
Through loan rehabilitation, you must make nine consecutive payments on time. Under this option, you will be set up with a reasonable payment plan, with monthly payments that are equal to 15 percent of your discretionary income.
Step 5: Contact the IRS
If your student loan payments are overdue, unfortunately, the government is well within its rights to come after and garnish your tax refund. Through the Treasury Offset Program (TOP), the government can seize your refund in order to repay your defaulted student loans.
But having your tax refund garnished should come as no surprise. You will receive a notice letting you know that a tax offset will occur before any action is taken.
If you didn’t get a notice or have any questions or concerns regarding the tax offset, you can contact the IRS at 800-304-3107.
According to legal site NOLO, student loan borrowers have 65 days from the time of the notice to request a review and object to the tax offset. You may want to object if there’s been a misunderstanding surrounding your student loan payments or if your loan is in the process of being forgiven or discharged.
The best way to avoid a student loan tax refund garnishment is to keep making payments. If you’re struggling to keep up, get in touch with your loan servicer to discuss options.
If you’re already dealing with a potential tax offset, contact the IRS as well as your loan servicer to figure out your next steps. Just don’t ignore the problem, because there’s help out there.
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