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.
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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.
- Call 1-844-669-4407 to get help from a private company.
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 use this form. 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.
Compare the Best Student Loan Refinance Rates
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.