Tax Refund Garnished Due to Student Loan Default? Here’s How to Get It Back

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You’ve graduated from college, and you’re working but not making enough money. It can be tough to pay rent, car payments, and other bills, including student loans.

In such a situation, every little bit helps, including tax refunds. You might be looking forward to using a refund to pay down debt or stay current on important bills. But if your federal student loans are in default because you haven’t been making payments, your tax refund could be taken away.

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 tax refund.

What is student loan default?

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.”

How you can end up in a tax offset

The Bureau of the Fiscal Service collects all kinds of delinquent debt, including mortgages, fines, and else anything owed to the federal government.

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.

3 ways to avoid a tax offset

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.

You can avoid a tax offset

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 tax offset hardship refund might be difficult, depending on your circumstances.

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.