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 9 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.87% – 6.15%1||Undergrad & Graduate|
|1.88% – 5.64%2||Undergrad & Graduate|
|2.50% – 6.85%3||Undergrad & Graduate|
|1.89% – 5.90%4||Undergrad & Graduate|
|1.74% – 6.59%5||Undergrad & Graduate|
|1.90% – 5.25%6||Undergrad & Graduate|
|1.88% – 5.64%7||Undergrad & Graduate|
|1.86% – 6.01%||Undergrad |
|2.13% – 5.25%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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 June 1, 2021.
2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
Interest Rate Disclosure
Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.44% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance 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 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions.
Auto Pay Discount Disclosure
You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.
Student Loan Refinancing Loan Cost Examples
These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License.
One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America.
© 2021 Earnest LLC. All rights reserved.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.15% effective Jan 1, 2021 and may increase after consummation.
4 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. 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. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
5 Important Disclosures for SoFi.
Fixed rates range from 2.49% APR to 6.94% APR with a 0.25% autopay discount. Variable rates from 1.74% APR to 6.59% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.
6 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 11/15/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.75% Fixed APR with AutoPay.
7 Important Disclosures for Navient.
8 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. 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.