How to Avoid a Student Loan Tax Refund OffsetMarch 13, 2023
When your student loans go into default, there are several potential consequences, ranging from an impact on your credit score to a tax refund offset on student loans.
Having a tax refund offset on your student loans could result in less money than expected during tax season, setting you back on your financial goals. Before you end up with a student loan default tax garnishment, here’s what you need to know.
Will Student Loans Take My Tax Refund?
First, it’s important to note that the government has halted tax refund garnishment on student loans until the middle of 2023. This action went into effect on March 13, 2020, shortly after the COVID-19 pandemic began. If you have experienced a tax refund offset related to your student loans since then, you should contact the Treasury Offset Program to see if you’re eligible to have some of that money returned.
Under normal circumstances, your tax refund can be garnished to pay student loans in default. This is a process known as garnishment. In short, if your student loan is in default, the Treasury Department can match that up with your expected tax refund after you submit your tax return.
Money from your tax refund is directed toward your student loan debt, which is in default. As part of the process, you’ll receive a notice that your tax refund offset is coming.
Can You Stop the IRS From Garnishing Your Tax Refund?
It may be possible to stop the IRS from garnishing your tax refund, though you can’t always halt the process.
Before your tax refund is garnished to pay student loans, you’re likely to receive a notice in the mail. Additionally, you’re usually notified when your student loans go into default. Pay attention to notices since they can provide you with vital information to help you avoid having defaulted student loans taken from a tax refund.
Once you receive your notice, make sure to review your student loan records. You should be able to verify whether you’re in default. If there’s a mistake, you can challenge the tax refund offset and have the process stopped before your tax refund is garnished.
The steps you can take to freeze or reverse the process of defaulted student loans being taken from a tax refund include:
- Request your loan file within 20 days of receiving the notice so you can review the student loans and see your status.
- Using the information in your loan file, request a review (the form is available from your servicer) of the tax refund offset within 15 days of receiving your loan file.
There’s no guarantee that this will stop the process, but it can be one way to slow things down and give you time to improve your situation.
How to Stop a Student Loan Tax Refund Offset
Other actions could also help stop you from having your tax refund garnished by the IRS or qualify you for a refund, including:
- Debt repayment. Providing proof of repayment could entitle you to a full tax return refund. If you’ve repaid your loans, gather account statements and payment confirmations from your student loan servicer.
- Student loan discharge. A student loan discharge could also stop a tax refund offset or entitle you to a refund. Provide copies of documents as proof of your loan discharge, including applications and discharge orders.
- Payment agreement. If you have a payment agreement with the Department of Education to rehabilitate your loans and you’re making the payments, you may be able to halt the garnishment or get a refund. Share proof of payment, such as confirmations or receipts.
- Financial hardship. A significant financial hardship may also help you halt or reverse the garnishment, but you’ll need proof of the hardship.
Eligibility for a Student Loan Offset Hardship Refund
You may qualify for a student loan offset refund in certain cases due to financial hardship. Here are some situations where you could be eligible for a hardship refund:
- You’re homeless.
- Your student loans were discharged in bankruptcy.
- Your unemployment benefits have expired, and you have no source of income.
- Your utilities have been shut off in your home for failure to pay.
- You’re being evicted, or your home is in foreclosure.
- You’re permanently disabled.
How to Avoid Defaulting on Student Loans
Avoiding default can be one way to keep from worrying about student loan tax refund garnishment. You can avoid default by making your payments on time and in full.
Additionally, if you’re experiencing financial hardship, find out your options to make your payments more manageable. Rather than ignoring the problem, it’s essential to confront it head-on and do your best to find solutions.
Some of the ways to keep out of default include:
- Income-driven repayment: You might be eligible for an income-driven repayment (IDR) plan if you have federal student loans. These four different programs base your monthly payments on your discretionary income. This can even include setting your payment to $0 per month. When on income-driven repayment, as long as you make your new monthly payment on time and in full, you won’t have to worry about default.
- Consolidation: Federal Direct Loans can be consolidated, resulting in a longer repayment term if the balance is high enough. A longer repayment term can lead to a lower, more manageable monthly payment. However, it’s important to note that you could end up paying more overall because of the way interest accrues over time.
- Refinancing: You can also refinance your student loans to a private lender. If you have good credit or a credit-worthy cosigner, you could potentially refinance your loans to a lower rate to save on interest costs over time. Once you refinance, though, keep in mind that you’ll lose access to federal programs like income-driven repayment and loan forgiveness.
- Deferment or forbearance: In hardship situations, you can also ask for student loan deferment or forbearance. These options allow you to put off making payments for a time. It keeps you out of default and prevents having your tax refund garnished to pay student loans. However, interest might still accrue, and you could lengthen the time you’re in debt and see a growing balance.
Carefully consider your options before moving forward, and choose a path that’s most likely to provide you the relief you need while keeping you out of default — and keeping your tax refund intact. Later, if you decide it makes sense for your situation, you can use some of your tax refund amount to make a student loan payment.
Refinance Your Student Loans with ELFI
If you’ve considered your situation and decided the benefits of refinancing student loans outweigh the potential drawbacks, ELFI offers some options. Borrowers who meet the requirements for student loan refinancing could benefit from competitive rates and longer repayment terms, which may reduce monthly payments and make them more manageable.
Learn more about refinancing your student loans with ELFI.