How to Recover Your Refund After Student Loan Tax Offset


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Learn how to get a student loan tax refund if your federal student loans are in default. (Shutterstock)

Failure to make federal student loan payments on time can trigger what is called a tax refund set-off, which allows the government to step in and collect any tax returns owed to you. But if Uncle Sam takes your tax refund to pay off your delinquent loans, you may be able to get the money back if you can prove financial hardship.

Here’s what you need to know about student loan hardship repayment.

To learn more about student loan refinancing, visit Credible to compare student loan refinance rates.

What is a student loan tax offset?

When federal student borrowers fall behind in loan repayment, the Department of Education allows the government to collect the debt through other means. This most often happens under the Treasury Compensation Program, or TOP.

The TOP allows the government to offset or withhold certain government-issued benefits and funds from individuals, businesses, and other entities that may owe money to the federal government. In many cases, this includes offenders student borrowers. Eligible payments that can be entered through the TOP include tax returns, social security benefits, federal salaries, and more.

If your federal student loans are in default, you may receive an overdue debt notice directly from the lender. Lenders are required to provide this tax offset notice to the loan holder at least 60 days prior to submitting the debt to the TOP. Upon receipt of this notice, you will be given the opportunity to pay the debt, dispute the debt, or negotiate a payment agreement for the balance.

If the debt remains outstanding without resolution for 120 days, the agency will forward it to the clearing program. The debt will then be entered into the Bureau of Fiscal Service database, where it will trigger compensation if a government payment agency attempts to send you money.

This means that if you’re expecting an income tax refund this year and you’ve fallen behind on your federal student loan payments, the government could withhold your refund instead to cover your loan arrears. federal.

How the Pandemic Postponement Affects Student Loan Tax Offsets

The federal government suspended federal student loan payments in March 2020 in response to the COVID-19 pandemic. Since then, eligible borrowers have seen 0% interest and no payments on their federal student loan debt. The US Department of Education also suspended collection activities for all delinquent loans at that time, so delinquent borrowers did not have to worry about set-offs.

But payments will resume soon, along with efforts to collect any defaulted federal loans. For borrowers who were previously in default – or who cannot afford to make their payments in the future – tax offsetting can be a real concern.

What is a Student Loan Tax Offset Hardship Repayment?

Even if you default on your federal student loan, you may still be able to keep your income tax refund or other government payments. To do this, you will first need to apply for a hardship reimbursement.

If approved by the lender, a financial hardship refund may allow you to receive part of your federal income tax refund, if not the entire amount. You will still owe your delinquent loans, but your government payments will not be withheld to settle the delinquent debt.

What are the eligibility requirements for a tax offset hardship refund?

In order to be eligible for a tax hardship refund, you will need to meet certain criteria or be able to demonstrate financial hardship. Some eligibility requirements include:

  • You have an open bankruptcy file.
  • Your loan has been tampered with and you have been the victim of identity theft.
  • You are permanently disabled.
  • You are already making payments as agreed, in accordance with your repayment agreement.
  • There was an error with your loan(s) and you are not actually in default.
  • Your loan is eligible for discharge because your school has closed.

If your spouse is actually responsible for the tax compensation, you may be able to claim your share of a tax refund by filing IRS Form 8379 as injured spouse. It does not mean that any of you are physically injured. It simply means that a tax offset from your joint filing would be detrimental to you even if the debt did not belong to you.

How to Claim a Student Loan Financial Hardship Tax Refund

If you are in default on your federal student loans, or if you were in default before the government began suspending payments, you may want to apply for a hardship refund to clear your student loan before your refund begins. income tax (or other payments) is withheld.

Follow these steps to request a student loan tax offset hardship refund:

  1. Contact the TOP at 800-304-3107 to find out exactly which agency holds the outstanding debt(s).
  2. Contact that agency directly to see if there are any programs or payment terms to get your loan out of default or avoid further missed payments.
  3. To file a hardship exception request, you will likely need to fill out a form with your loan officer.
  4. Your repairer will want to know the reason for your difficulties and why you think you qualify for an exemption. Expect to provide evidence of your hardship, including utility disconnect statements, eviction notices, proof of homelessness, or proof of exhausted unemployment benefits.

If you are considering refinancing, Credible allows you compare student loan refinance rates without affecting your credit.

How to Avoid Tax Offset for a Student Loan

The easiest way to avoid tax offset is to pay your federal student loans on time and as agreed. But this is not always possible, and difficulties may arise that prevent you from being able to make the monthly payments on your loan.

If you’re struggling to pay your federal debt and want to avoid defaulting on your student loan, here are some options to explore.

Request a postponement or abstention

Federal student loans offer forbearance and deferment options to borrowers who are temporarily unable to make their regular monthly payments.

With forbearance, your loan payments will be suspended or reduced for a specific period of time, although the balance will continue to earn interest. With the adjournment, federal loan repayments will be temporarily postponed in the event of hardship. But qualifying loans will not accrue additional interest charges during a deferment period.

Keep in mind that if you are looking to have part of your debt canceled after a certain number of payments under a student loan forgiveness programmonths spent in adjournment or abstention are generally not taken into account in the required period.

To request a deferral or forbearance, contact your federal student loan officer.

Income Oriented Repayment Plans

An income-contingent repayment (IDR) plan allows you to adjust the monthly payment of your eligible federal student loan(s) so that it is affordable. IDRs ensure that your monthly student loan payments do not make up a large portion of your income.

The Department of Education offers four different IDR plans, depending on the types of federal student loans you have: income-based repayment (IBR), income-based repayment (ICR), pay-as-you-go (PAYE ) and revision. Pay as you earn (REPAY).

The monthly payment amount required on these plans typically ranges from 10% to 25% of your Discretionary Income, although some borrowers may have no payment at all. And note that the required payment may be adjusted up or down if your income changes in the future.

To request an IDR plan, contact your loan manager.

Federal consolidation loan

Loan consolidation can help reduce your monthly student loan payment and simplify the process.

If you have federal student loan debt, you may be able to apply for a direct consolidation loan. This will combine all of your eligible federal student loans into one loan, with a single interest rate that will be a weighted average of the rates on your consolidated loans. You will only have one monthly payment and one account to track.

For more information on Direct Consolidation Loans or to apply online, visit Federal Student Aid website.

Refinancing into a private student loan

If your loans do not qualify for consolidation or if you also have private student loan debt, you may consider refinancing your federal loans, your private loans or a combination of both into a new private student loan. These are offered by private lenders, each with their own eligibility requirements, loan terms and interest rates.

Refinancing of federal loans into private loans means the loss of some federal loan benefits, such as IDR plans and Public Service Loan Forgiveness (PSLF). So keep that in mind before going ahead. But private loans can offer lower interest rates in some cases, which could save you money on paying off your loan in the end.

If you choose to refinance your student loan into a private student loan, it’s important to shop around and compare lenders to ensure you’re getting the best possible rates for your situation.

With Credible, you can compare student loan refinance rates from various lenders, all in one place.

Adjust your tax deduction

If you’re worried about losing your tax refund due to offsetting, you might want to consider whether you should get a taxpayer refund first.

Getting a tax refund is the result of overpaying taxes throughout the year. You basically gave Uncle Sam an interest-free loan all year, and he gives you the money back at tax time.

Most of us could think of better ways to use those funds, especially if you have student loans in default. It may be a good idea to adjust your tax deductions so that you pay as close to your exact tax bill as possible. This allows you to keep more of your money in your pocket for the year, and there won’t be any refunds to make up for in the first place.


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