Defaulting on your federal student loans will not only wreck your credit, but the government can take action to collect its money. It can withhold money from your wages or even resort to tax refund garnishment for student loans, which is called a Treasury offset or a tax offset.
If you default on your student loans, here’s how to get a refund on a tax offset — and how to avoid it in the first place.
What to do if your tax refund is garnished for student loans
What if you can’t get a tax offset hardship refund?
How to avoid a tax refund garnishment in the first place
Taking action on tax refund garnishment for student loans
The IRS reported that the average tax refund was $2,860 in 2019. But according to Leslie H. Tayne, a financial attorney, that refund may no longer be yours if you’ve defaulted on your student loans.
“Through the Treasury Offset Program, state and federal government agencies can garnish your tax refund,” said Tayne, who is an expert on student loans.
For many people, their annual tax refund is the most significant financial windfall they’ll see all year. If you’re counting on that money to pay medical bills or other necessary expenses, student loan tax return garnishment can be devastating.
However, there may be a way to get some of the tax offset refunded to you in certain circumstances.
“In some cases, it is possible to have some or all of the money returned to you from a tax return garnishment,” Tayne said. “With student loans, for example, you can challenge the garnishment by requesting a formal review with your loan holder.”
You may qualify for a refund of the tax offset if you meet one of the following criteria:
- You entered into a repayment agreement with the lender and have started making payments.
- The school failed to issue you a refund it owed you.
- You have become totally and permanently disabled.
- The tax offset would cause extreme financial hardship.
- The loan is not enforceable, meaning it’s fraudulently under your name.
- You are eligible for borrower defense to repayment discharge due to school misconduct.
- You qualify for a closed school or false certification discharge.
How to get a student loan tax offset hardship refund
To request a refund of the tax offset, follow these steps:
- Look at your notice: Before the tax offset is in place, the government will send you a written notice. The notice will contain information about the tax offset, including where to file a request for review.
- Find your loan servicer: If you’re not sure who is managing your loan, use the National Student Loan Data System to identify your loan servicer. The servicer is your key contact throughout this process.
- Request the loan file: You must ask the loan servicer to see the loan file within 20 days of receiving the tax offset notification.
- Request a review: If you believe you’re eligible for a refund of the tax offset, you must issue a challenge by sending a formal request to the address in your notification letter. You must submit it within 65 days after the date of the notice, or 15 days after the request to see the loan file, whichever is later.
- Submit documentation: You must submit a notification letter showing the amount of your tax refund, proof of your annual income and a recent bank statement. If you’re facing a financial emergency, such as eviction from your home, you can include that notification with your documents. You can also add a letter explaining any extenuating circumstances that you feel make you exempt from the tax offset.
- Participate in a hearing: You can opt for a telephone or in-person hearing to make your case. If you choose an in-person hearing, you’re responsible for covering your own travel expenses.
- Wait for the loan servicer’s decision: The loan servicer will review your case, including your statement at your hearing and any documentation you submitted. It will issue a decision and either refund the tax offset or notify you that your request was denied.
For more information, including who to contact about default resolution, visit MyEdDebt.Ed.gov, or call the Treasury Offset Program at 800-304-3107.
Protecting your spouse’s refund
If you’re married and file a joint return, you may still be able to protect your spouse’s share of the tax refund even if you’re subject to a tax offset. To do so, you must fill out Form 8379-Injured Spouse Allocation and either submit it with your tax return or mail it in by itself after you file your return.
Unfortunately, you can’t always qualify for a refund of the tax offset. If that’s the case for you, take action now to prevent losing your tax refund next year.
If your loans are in default, there are four options available to you.
1. Loan consolidation
One way to get out of default is to consolidate your debt with a Direct Consolidation Loan. With this approach, you combine your loans into one and agree to repay the new loan under an income-driven repayment plan.
Before you can consolidate your debt, you must make three consecutive, voluntary payments for the full minimum due on the defaulted loan.
Once your loan is consolidated, it will no longer be in default, and you’ll regain eligibility for benefits like federal forbearance and deferment. However, consolidating your defaulted loan does not remove the default from your credit history.
2. Loan rehabilitation
To pursue loan rehabilitation, you must contact your loan servicer and agree in writing to make nine voluntary, reasonable and affordable monthly payments — as decided by your loan servicer — within 20 days of the due date. You must make all nine of the required payments during a period of 10 consecutive months.
Depending on your income, your monthly payment could be as low as $5 while you work toward loan rehabilitation. Once you’ve made all nine required payments within the designated time frame, your loans will no longer be in default. If you rehabilitate a defaulted loan, it will be removed from your credit history.
Keep in mind that you only get one shot at loan rehabilitation; if you default on your loans in the future, you won’t be able to use this option again.
3. Pay in full
If you’ve defaulted on your loans, you’re probably short on cash. Paying off your loan balance in full may seem impossible, but it might be an option for you.
Consider asking family and friends for help or selling unused items to raise enough money to pay off the loan.
4. Student loan refinancing
If you want to pay off your loans in full but don’t have the money on hand, another way to get out of default is to refinance your student loans. With this approach, you work with a private lender to take out a loan for the amount of your current loans. You use the new loan to pay off your existing debt, ending the default.
The new loan will have different loan terms, including interest rate and loan length. And, it will be a private loan, so it isn’t eligible for federal benefits like income-driven repayment plans.
If you’ve defaulted on your loans, your credit score is likely fairly low, so you may not qualify for refinancing on your own. One way around that obstacle is to ask a friend or relative with good credit and a stable income to co-sign the loan with you.
While it’s possible to get a refund of the tax offset, it’s difficult. It’s better to take action before the Treasury offset goes into effect, as the loan servicer can also garnish your wages and even withhold money from your Social Security benefits.
Consider these options to avoid tax refund garnishment for student loans.
Contact your loan servicer or the IRS
If you think there has been a mistake, such as a student loan account appearing under your name, contact your loan servicer to flag the problem. Then, contact the IRS directly to explain the issue and what steps you’ve taken to fix it
Get out of default
You don’t have to wait for your tax refund to be garnished to take advantage of consolidation, loan rehabilitation or to pay off your balance in full. Taking action now will end your loan’s default right away, stopping the loan servicer from garnishing your refund or sending you to collections.
Consider income-driven repayment plans
If you’re struggling to afford your payments, but haven’t yet defaulted on your loans, Tayne recommended applying for an income-driven repayment (IDR) plan.
“If an individual is struggling to make student loan payments, they can contact their loan officer to discuss changing their repayment plan to get a potentially lower monthly payment,” she said.
With an IDR plan, your payment term is extended to 20 to 25 years. And, your loan servicer will set your monthly payment at a percentage of your discretionary income. Depending on your income and family size, you could dramatically reduce your monthly payment.
Request a deferment or forbearance
If you’re facing a financial hardship, like a medical emergency, or if you’ve lost your job, you can request a deferment or forbearance. Under these options, you can postpone making your payments for several months, giving you some time to get back on your feet without defaulting on your loans. Keep in mind that interest may continue accruing during this time period, though.
If you are in default with your student loans and your tax refund is being garnished, it’s easy to feel overwhelmed or even ashamed. But unfortunately, your situation is very common. A recent survey found that 40% of student loan borrowers said they were struggling to afford their next payment.
Whatever your situation, it’s important to take action. You may be able to get the tax offset refunded, and you can start repairing your finances and get out of student loan default. If you can’t keep up with your payments, use these five strategies to take charge of your debt.
Melanie Lockhert contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
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|3.19% – 6.08%5||Undergrad & Graduate|
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1 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
ANNUAL PERCENTAGE RATE (“APR”)
There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.
For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
ELIGIBILITY & ELIGIBLE LOANS
Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).
Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.
All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.
For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.
The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.
The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.
POSTPONING OR REDUCING PAYMENTS
After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.
We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.
We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.
If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of June 23, 2020 and is subject to change.
2 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Splash Financial loans are available through arrangements with lending partners. Your loan application will be submitted to the lending partner and be evaluated at their sole discretion. For loans where a credit union is the lender, or a purchaser of the loan, in order to refinance your loans, you will need to become a credit union member.
The Splash Student Loan Refinance Program is not offered or endorsed by any college or university. Neither Splash Financial nor the lending partner are affiliated with or endorse any college or university listed on this website.
You should review the benefits of your federal student loan; it may offer specific benefits that a private refinance/consolidation loan may not offer. If you work in the public sector, are in the military or taking advantage of a federal department of relief program, such as income based repayment or public service forgiveness, you may not want to refinance, as these benefits do not transfer to private refinance/consolidation loans.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2020.
Fixed APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rate options range from 2.88% (without autopay) to 7.27% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Rates are subject to change without notice. Fixed rate options without an autopay discount consist of a range from 2.88% per year to 6.21% per year for a 5-year term, 3.40% per year to 6.25% per year for a 7-year term, 3.45% to 5.08% for a 8-year term, 3.89% per year to 6.65% per year for a 10-year term, 4.18% per year to 5.11% per year for a 12-year term, 4.20% per year to 7.05% per year for a 15-year term, or 4.51% per year to 7.27% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan).
Variable APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Variable rate options range from 1.99% (with autopay) to 7.10% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Our lowest rate option is shown with a 0.25% autopay discount. Our highest rate option does not include an autopay discount. The variable rates are based on the Variable rate index, is based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 27, 2020, the one-month LIBOR rate is 0.43763%. The interest rate on a variable rate loan is comprised of an index and margin added together. The margin is a fixed amount (disclosed at the time of your loan application) added each month to the index to determine the next month’s variable rate. Variable rate options without an autopay discount consist of a range from 2.01% per year to 6.30% per year for a 5-year term, 4.00% per year to 6.35% per year for a 7-year term, 2.09% per year to 3.92% per year for a 8-year term, 4.25% per year to 6.40% per year for a 10-year term, 2.67% per year to 4.56% per year for a 12-year term, 3.44% per year to 6.65% per year for a 15-year term, 4.75% per year to 6.93% per year for a 20-year term, or 5.14% per year to 7.10% for a 25-year term, with no origination fees. APR is subject to increase after consummation. Variable interest rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. The maximum variable rate may be between 9.00% and 16.00%, depending on loan term. The floor rate may be between 0.54% and 4.21%, depending on loan term. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
3 Important Disclosures for SoFi.
4 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.19% APR (with Auto Pay) to 6.43% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.43% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of June 15, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 6/15/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.2% effective May 10, 2020.