If your federal student loans are in default, the Department of Education can refer your account to the Department of Treasury for collection by an offset of your federal (and in some cases state) tax returns. The Department of Treasury can withhold the entire amount of your refund to satisfy the debt that is owed. If you filed a joint return, the IRS can and will withhold your spouse’s refund, although your spouse may be entitled to all or part of the refund offset.
How To Know If Your Taxes Will Be Offset
Generally, if you have defaulted student loans that have been assigned to a collections agency, your taxes will likely be withheld by the IRS to pay off a portion of your debt. The law states the that the IRS must provide you with a proposed offset, and the opportunity for you to review your loan records. This notice would be sent to you via mail, at the best address that the IRS is able to find for you. If you never receive this letter, it is not grounds for challenging the tax offset, although you can challenge the offset for other reasons as you will see below.
The IRS provides a toll-free number which you can call, go through the automated prompts, and see if you have any offsets pending on your social. Their number is (800)304-3107.
How To Prevent The Tax Offset
If you believe your taxes will be offset due to a delinquent debt, your best option is to get your student loans out of default. To do that, you have a few options
- Consolidate your loans into the Direct Loan program. If you are eligible for this consolidation, all your loans would be bundled up into one new loan, likely with a new federal lender. When your loan consolidation is complete, your new loan will be out of default and in good standing. During this consolidation, you are also able to choose a payment plan that is affordable for you. The Pay As You Earn(PAYE) and Income-Based Repayment Plan(IBR) both can offer payments as low as $0.00 per month depending on your income and family size. The consolidation process can take up to 30-90 days from when first filed, so it’s important to start this process as soon as you can.
- Rehabilitate your loans with your current lender. If you and your lender can agree on a reasonable and affordable payment plan, you can start to make payments under this rehabilitation to get your loans back into good standing. Typically a rehab will take nine months, and any late payments will restart your recovery period. After the rehabilitation is completed, you will likely be back to having to make larger payments on your student loans, but you will no longer be in default or be underin threat of a tax offset or wage garnishment.
- Repay your defaulted student loans in full. If your loan balance is an amount that you can pay off in full, this is an option as well. Unfortunately, this is rare, and most borrowers must select to consolidate their loans, or enter a rehabilitation on their loans.
How Can I Challenge The Tax Offset?
First, its important to understand that the tax offset is legal, and the IRS can and will withhold your tax refund according to law. To try and challenge the offset would require you to have a very valid reason as to why the tax offset should never have occurred. Some challenges that are valid for a refund of the tax offset:
- The debt is no longer owed and has been paid off prior to the offset
- You have entered into a rehabilitation with the lender and are making satisfactory payments according to that rehabilitation schedule
- You are in an active bankruptcy
- The debt has been discharged through bankruptcy or disability discharge
- You are totally & permanently physically challenged
- You believe the debt is not an enforceable debt
To challenge the offset, you should visit this link. You can apply to have a hearing over the phone, in person, or online. Generally speaking, it is tough to get the tax offset reversed, and the best plan of action is to take the appropriate steps before the offset actually happens. Unfortunately, many people simply do not realize the severity of their federal student loans being in default and do not take action until its too late. In this case, it’s appropriate to file a challenge if you believe that you have a valid reason as to why the tax offset should not have happened in the first place.
What About My Spouses Tax Refund?
Any federal tax refunds that are payable to a couple that is filing their taxes jointly is also subject to a tax offset regardless if only one person owes that debt. This means if your loans are in default, your spouse’s tax refund will also be withheld. Once the tax offset happens, the spouse can file an “injured spouse” claim with the IRS to retrieve their portion of the offset that was withheld. To be considered an injured spouse, you must:
- Have paid federal income taxes, or claimed a refundable tax credit.
- Have filed a joint return, and you’re not responsible for the debt that created the offset
You will want to use form 8379 to file your injured spouse claim. For more instructions, please see the IRS web page.