Spring means blooming flowers, budding trees and, if you’re lucky, a lovely federal tax refund from Uncle Sam to go toward a big purchase, paying down debt or padding your savings account. But if you’ve defaulted on a federal student loan. your tax refund may not appear as expected.
Most federal student loans are considered to be in default when payments are 270 days or more past due.
Once your student loan hits default status, the federal government can and will go to extreme lengths to reclaim its money. One of those methods is the Treasury Offset Program, a U.S. Department of the Treasury program that can seize federal payments owed to you to in order to pay delinquent debts owed to other federal agencies, like the U.S. Department of Education.
Here are some of the top questions we answer about college and graduate school student loan tax refund offsets each year around this time.
1. How do I know if my tax refund will be seized? Federal law requires that the holder of your defaulted federal loan – the U.S. Department of Education, a guaranty agency acting on behalf of the department or your school – send you proper notice before an offset occurs. The notices are sent to you using the best address available to the department, from all legally available resources, including the most recent address used by you in your most recent federal tax return.
The notice typically goes out at the end of the summer to give you an opportunity to resolve the defaulted loan before the account is certified for offset.
2. How much of my tax refund can be seized? Up to 100 percent of your tax refund can be taken, and you can still be subject to an offset even if your wages are being garnished as well. Funds can be taken without your permission, but you will receive information regarding the amount and date of your offset.
3. Can I stop the offset? You may be able to avoid the tax offset if you set up a satisfactory repayment arrangement and begin making payments before the deadline outlined in the warning notice. Payments made under a voluntary payment plan are often lower than the amount taken through garnishment and can lead to resolving the default altogether through
rehabilitation or consolidation.
Contact your loan holder to get started. You can find this information by going to the National Student Loan Data System .
4. Can only my federal tax refund be seized? No. A number of states have laws authorizing state guaranty agencies to take state income tax refunds as well. You should be able to identify if your loan is with a guaranty agency by visiting the student loan data system. Additionally, any other federal payments or benefits owed to you, such as Social Security, as well as your wages can be garnished.
5. Can I challenge the offset? Yes, you can request a hearing to appeal to the U.S. Department of Education or guaranty agency, either before or after the offset occurs. It's best to do so as soon as you get the notice about the offset process. If you dispute the offset after it occurs and it’s proven to be in error, the federal government will refund you.
You cannot challenge the offset simply because you did not receive a notice from your loan holder, but you can dispute it if you can prove you’ve repaid the defaulted loan, the loan isn’t yours, the loan was formerly discharged in bankruptcy, you’re totally and permanently disabled or for other reasons. You may also be able to challenge your offset if it will cause financial hardship.
6. How can I prevent tax refund offsets? The easiest way to never face tax refund garnishment is to avoid default in the first place. Much has been written about the lack of consumer protections, like bankruptcy, for student loan borrowers in financial distress. But in reality, federal student loans offer many more options to avoid default than most other forms of consumer debt.
After all, you can’t temporarily postpone payments on your mortgage, car loan or credit cards because of economic hardship, unemployment, military service or because you’re going back to school. But you can with your federal student loans.
The trick is to maximize your rights and take advantage of your options before you get into trouble. If you can’t make your monthly payment, contact your loan holder immediately and ask about your options. That way, this time next year you’ll be holding a fat tax refund check instead of the dreaded offset letter.