College is a time for you to become independent, make lasting memories, and pursue an education that leads to a career you’re passionate about. However, higher education can come at a cost. Once you graduate, you may have forgotten about all of the student loans you borrowed over the years to pay for your degree.
Students today are in a much different financial position than their parents were at their age. According to a recent report by the College Board, the average cost of tuition, fees, and room and board for private nonprofit four-year universities went from $25,900 in 1989-1990 to $49,870 in 2019-2020. For public four-year universities, that price jumped from $9,730 to $21,950 in the same timeline.
The cost of attending college rose dramatically over the past 30 years, leaving more and more graduates with substantial debt that can be challenging to repay on time and in full. Rent, groceries, medical bills—these are just some of the everyday expenses that can make you fall behind on your student loans. And if you borrow federal student loans, the government can take a variety of actions to satisfy your debts if you defaulted, such as garnishing your tax refund.
If you received a notice that the IRS took your tax refund, you might be in a bit of a panic. Don’t fret—there may be ways you can get your refund back if you can demonstrate financial hardship. Below, we’re going to cover what a student loan tax offset hardship is, explain the Department of Education hardship deferment form, and how to appeal student loan tax offset. Read through for all your options for navigating student loan offset, or use the list below to jump to a specific section.
- What does the student loan tax offset mean?
- What happens if you default on your student loans?
- How to stop student loan tax garnishment
- How to appeal student loan tax offset
- Where are the student loan tax offset hardship refund forms?
Note to readers: On March 27th, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and President Trump signed it into law. The CARES Act put a halt to all garnishments, among other measures, beginning on March 13th, 2020. The CARES Act aims to provide economic assistance to American workers, families, and businesses to ease the impact of the coronavirus pandemic.
If your income tax refund, Social Security, or other federal payments were garnished on or after March 13th, you can contact the Treasury Offset Program at 1.800.304.3107 to begin the process of reclaiming your income tax refund. For additional information about the CARES Act and your federal student loans, refer to the Federal Student Aid website.
What does the student loan tax offset mean?
Student loan tax offset refers to the government’s power to garnish your tax refund through the IRS to satisfy your outstanding federal student loans in default. When you default on a federal student loan, the Department of Education works with other federal agencies, such as the U.S. Department of Treasury, to determine if you are owed any federal payments, such as Social Security benefits, an income tax refund, and more.
If the Department of Education matches your taxpayer identification number (TIN) with the same TIN assigned to a federal payment, that payment may be allocated toward your defaulted federal loans. This withholding is referred to as a Treasury Offset.
For example, if you have $10,000 worth of defaulted student loans and are expecting a tax refund of $2,000, the Department of Education can ask the IRS to put that $2,000 toward your defaulted student loan debts. This will drop your student loan balance down to $8,000. For most federal student loans, you are considered to have defaulted if you failed to make loan payments for at least 270 days.
What happens if you default on your student loans?
Defaulting on federal student loans is never an ideal scenario. For some, a garnished tax refund can cause financial hardship. Maybe you created a budget and planned to put your tax refund toward other high-interest debts or to settle large credit card statements. Or perhaps, an unexpected medical bill popped up and you need your tax refund to cover some or all of the costs. In these cases, a student loan offset can put a major dent in your financial plans.
When it comes to federal student loans, the Department of Education issues three different types:
- William D. Ford Federal Direct Loan (Direct Loan) Program
- Federal Family Education Loan (FFEL) Program
- Federal Perkins Loan Program
Defaulting on any of these federal student loans can lead to some costly consequences. To avoid a tax offset, you must pay your balance in full, including interest and any accrued penalties, within 60 days of receiving your Notice of Intent to Offset. If you fail to pay in full by the deadline, you may face a variety of consequences that can sink you further into debt. Some consequences of default, on top of a tax offset for student loans, might include:
- Acceleration: You must immediately pay the entire unpaid balance and any interest you owe of your loan.
- Wage Garnishment: Your employer may be required to garnish wages and send a portion of your earnings to your loan provider to pay off your defaulted student loan.
- Court: You can be taken to court and may face costs such as attorney’s and collection fees, as well as other payments associated with the collection process.
- Damaged Credit Score: Your loan holder can alert credit bureaus that you defaulted on your loan, which can damage your credit rating, thereby making it difficult to buy a home, car, or get a credit card.
- Loss of Benefits: You may no longer have the ability to choose a repayment plan, and could disqualify for deferment, forbearance, and additional federal student aid, as well as additional government benefits.
As you can see, defaulting on your federal student loans can have a severe impact on your financial future. You can lose access to repayment solutions that might have solved your needs, and may even be taken to court. The damage may compound itself if an offset tax refund impairs your ability to settle other debts or afford the standard cost of living.
Fortunately, if your tax refund was garnished, there may be ways to stop and appeal student loan tax garnishment to get your hard-earned refund returned to you.
How to stop student loan tax garnishment
If your tax refund was intercepted to offset your defaulted federal student loan debt, use the information below to learn how to stop student loan tax garnishment. There are a few ways you can stop student loan tax garnishment:
- Pay in Full: The easiest way to stop student loan tax garnishment is to repay your defaulted student loan in full. Once you default, acceleration occurs and mandates the total balance (and interest) to be repaid immediately. However, this is often not practical for many student loan borrowers, in which case the following options may be more feasible.
- Loan Rehabilitation: To qualify for loan rehabilitation, you must first contact your loan provider. Then, you must agree in writing to make nine voluntary, affordable, and reasonable monthly payments within 20 days of the due date. You must also make all nine payments during ten consecutive months. Your loan holder will determine the “reasonable” monthly payment amount by dividing 15 percent of your annual discretionary income by 12. Once you make your nine payments, you will no longer be in default.
- Loan Consolidation: Consolidating your defaulted federal student loans into a Direct Consolidation Loan is another option to get out of default. This option allows you to pay off some or all of your student loans in the form of a new consolidated loan. To consolidate, you must either agree to repay your new Direct Consolidation Loan under an income-driven repayment plan or make three voluntary, on-time, consecutive, full monthly payments on your defaulted loan before consolidating.
- Apply for Deferment or Forbearance: If you haven’t yet defaulted, you can apply for deferment or forbearance. Using one of the Department of Education Hardship Deferment Forms, you can postpone your federal student loan payments for up to three years. These payments might also be interest-free, depending on your loan type. Forbearance, on the other hand, has different eligibility requirements and can postpone your student loan payments for up to a year. However, interest will continue to accrue.
- Avoid Student Loan Debt: The best way to avoid student loan tax garnishment is by preventing unpaid debt in the first place. As stated, most federal student loans enter deferment after 270 days of missed payments. If you can make the minimum monthly payments on time each month, you can avoid defaulting and having your income tax return garnished.
In some cases, you may be married to a spouse who defaulted on their student loans. If you happened to file a joint tax return, your portion of the return might have been garnished. In this case, you will need to file IRS Form 8379: Injured Spouse Allocation. Applying for innocent or injured spouse relief can help you get your portion of your joint tax return back if you meet certain requirements, such as not knowing there was an understatement of tax or that your spouse was entirely responsible for the erroneous items.
How to appeal student loan tax offset
If your tax return was garnished, learning how to appeal the student loan tax offset should be your top priority. Whenever the government offsets federal payments, they will first send you a Notice of Intent to Offset in the mail. This notice will include your name, the amount offset, and information regarding the agency where your tax refund is going—which, in this case, is the Department of Education. As a reminder, only the federal government has the power to garnish your tax refund. If you have student loans from a private lender, they are unable to garnish your tax refund.
Once this notice arrives in the mail, it’s time to take action. Whether you believe the tax offset is an error or if you’re experiencing financial hardship, here are ways you can appeal a student loan tax offset:
- Error: In some cases, an error could have been made that placed your student loans in default. For example, an incorrect Social Security number can place someone else’s student loans under your name. If this is the case, contact the Treasury Offset Program. You may also need to file an amended return if you input the wrong Social Security number on your original tax return.
- Bankruptcy: If you filed for bankruptcy and your case is still open, or if your student loans were discharged in your bankruptcy case, you can appeal your student loan tax offset.
- Identity Theft: If your identity was stolen and your student loans were placed in default, you can appeal your student loan offset.
- Repayment Plan: If you’re in a current repayment plan agreement with the Department of Education and you’ve made your qualifying payments, you can appeal your tax offset if your tax return was garnished.
- Disability: If you’re permanently disabled, you can challenge your tax refund offset and reverse it to get your tax refund back.
In order to qualify for economic hardship, you must meet the IRS’s definition, which defines economic hardship as a taxpayer’s inability to pay their reasonable living expenses. To prove this, you’ll need to submit your financial statements for the IRS to review. Homelessness, eviction, exhaustion of unemployment benefits, qualifying for income-related health coverage exemptions, and similar situations can prove financial hardship. If they find you’re living a luxurious lifestyle, such as traveling frequently or buying lavish items, for example, they’ll most likely deny your financial hardship request and garnish your tax refund.
Another option for retrieving your tax refund is applying for a student loan tax offset refund. This request can help you get your tax refund back, whether it’s already been taken or not. We’ll go over how to complete the IRS hardship form for student loans and submit it to the Treasury Offset Program in the section below.
Where are the student loan tax offset hardship refund forms?
There are two common student loan tax offset hardship refund forms you can fill out and submit to apply for a reversal of your student loan offset: the Educational Credit Management Corporation (ECMC) form and the Department of Education Form. The first step to determining which form to complete is figuring out who offset your tax refund.
To find out who took your tax refund, you can:
- Go to the National Student Loan Data System to check the offset status of your defaulted federal student loan, or
- Call the Treasury Offset Program hotline at 1.800.304.3107 to get the status of your defaulted loans
Once you’ve determined that your federal student loans have default status, you can log into your “My Federal Student Aid” account to find out who your loan holder is.
If your federal student loans are with a loan guaranty agency, such as Trellis Company or ECMC, you will have to work with them. Or, your student loans might be with the Department of Education, meaning they will be your primary point of contact when it comes to applying for a student loan tax offset hardship refund. As stated, ECMC and the Department of Education are the two most common agencies that issue student loan tax offset refunds.
If you received a Notice of Default from ECMC, you will work with them to complete your student loan hardship form. You will have to completely and accurately fill out their Tax Offset Hardship Refund Request and send it to the address on the form. From there, you will have to wait to hear whether your request was approved or denied.
The Department of Education can also offset your tax refund. To ensure they were responsible, contact the Department of Education’s Default Resolution Group at 1.800.621.3115 and inquire about your federal student loan status. From there, you will complete their Request for Review and await their response.
With both student loan tax offset hardship refund forms, you will have to complete the application and provide substantial evidence of financial hardship. Make sure these documents of proof are copies and not the original, as you most likely won’t get them back.
How Community Tax Can Help
At Community Tax, we’re here to help you with all of your tax-related needs. Whether you’re in search of professional advice from a knowledgeable tax attorney or are in search of tax resolution services, such as negotiating a Currently Not Collectible Status or Offer in Compromise, we can help. Our team can provide you with all the information you need on tax offsets, and other common areas like general collection relief and how to file your tax return.
Putting off your student loans may be tempting. However, this can come with some expensive consequences in the long term. The options above can help you stop student loan tax garnishment and stay on track with your monthly payments to avoid or get out of deferment.