Avoiding Tax Offsets Due to Student Loan Debt

If your student loans are in default, you’re probably worried about your tax refund. Will the student loan lenders take it?

First, let’s set the record straight on private loans. Private student loan companies can’t take your tax refund. The lender may be able to take money from your bank account, but that’s only if they’ve sued you and won a judgment.

If your Federal loans are past due the government can’t do anything until you’re in default, which happens only when you fail to make a payment for 270 days.

If you’re in default, the government can seize your tax refunds through a tax refund offset. Before that happens, the lender or servicer has to give you notice of the proposed offset and an opportunity to review your loan records.

You can challenge the offset at any time, but if you want to put it on hold while you’re challenging it, you have some deadlines.

• If you want to see the loan file you have to make your request in writing within 20 days of the notice.
• If you want to request for review and put the offset on hold then you have to make sure it gets there no later than the later of 65 days after the date of the notice or 15 days after you request to see your loan file.

You can request a hearing after these deadlines, but the offset will generally not be held up while you are waiting for your hearing.

There are a number of defenses available to a tax refund offset, and they mirror the ones for defending an administrative wage garnishment. You may also be able to challenge your offset if it will cause financial hardship.

To find out if your tax refunds are subject to offset, contact BFS’ Tax Offset Program call center at 800-304-3107 or TDD 866-297-0517.

If you filed a joint return and it’s not your student loan, you can request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation with your original joint tax return, your amended joint tax return, or by itself after you’re notified of an offset.

Best Advice

1. Call BFS’ Tax Offset Program call center at 800-304-3107 or TDD 866-297-0517 to find out if you’re going to lose your refund.
2. Do a quick draft of your income tax return to see if you’re entitled to a refund this year.
3. If you are going to receive a refund, consider filing an extension so you’ve got some time to iron out the default.
4. If you can, consolidate your federal student loan immediately with the Direct Loan Consolidation program.
5. If you can’t consolidate because you’re already consolidated, consider going into rehabilitation.
6. If you’ve got to rehabilitate, talk with your tax professional about whether you should hold off on filing your taxes until the rehabilitation is complete.