Student Loan Tax Offset Hardship Refund: What It Is and How to Request It

If you don’t pay your federal student loans and are in loan default you could be in some real trouble. The government is serious about getting back what you owe, and a method it uses is called a “tax offset.”

There’s a way to get your money back through a student loan tax offset hardship request. But before that, you should know what a tax offset is and how to navigate the situation. It’s also important to get your student loans under control, even if you’ve entered tax offset.

Editor's Note: Until further notice, the Department of Education will not seize tax refunds of delinquent student loan borrowers due to the COVID-19 pandemic. You can submit your tax return now without fear of that refund being intercepted according to administration officials. Any tax refund that was seized on or after March 13, 2020 will be returned.

It is now clear that returns seized prior to March 13 WILL NOT be returned. Some readers have reported that Department of Education officials have claimed they will refund returns seized on or after March 5, but nothing in the official CARES Act suggests that will actually occur. If your tax refund was seized on or after March 13, 2020, call the Department of Education at 800-621-3115 to make sure that your address is current so that you will receive your check in the mail if you are eligible.   

What does a student loan tax offset mean?

Tax offset occurs when you’ve defaulted on your federal student loans. Your loan will default if you don’t make payments according to the promissory note you signed when taking out a student loan. When you default on your loan, you lose eligibility for repayment plans, and your loan will enter collections.

The U.S. Department of Education will also request that the U.S. Department of the Treasury withhold funds from your federal income tax returns. This is a student loan tax offset.

Your tax refund is taken if you didn’t follow through with your federal payments. If you file your taxes jointly with a spouse, the government can also take your spouse’s tax refund. All of your refund can be withheld as long as it doesn’t exceed the amount you currently owe.

How to know if you’re at risk of student loan tax offset

Before your tax offset begins, the government must inform you with a notice of offset. Through the IRS or Treasury Department, you’ll receive notice 65 days before the tax offset starts. However, the government only needs to send you one notice, which will be sent to your last previous known address. The notice should tell you exactly how much you owe and your rights.

Once you’re informed, the government can continue taking your income tax refund until the debt is paid. But you have options when dealing with tax offset.

If you’re in default, you can enter a repayment agreement. And if you shouldn’t be in tax offset, you’ll need to take the proper steps to make it right.

What if you shouldn’t be in student loan tax offset?

There are some cases where you shouldn’t be in tax offset even if you are given notice of one. Reasons you shouldn't undergo tax offset can include:

• You don’t owe the outstanding balance on the loan, and the Social Security number associated with it is wrong. This could be a case of identity theft or fraud.
• You’ve filed for bankruptcy, and it hasn’t yet been resolved.
• You’ve already entered into a payment arrangement and are making payments on the loan.
• Your school closed during the loan period, and the loan should be discharged.

All of these are reasons to object to a tax offset. You’ll want to act on this as soon as you get notice of a tax refund offset. Not getting the notice due to a change in address won’t count as an objection to a tax offset.

3 steps if you’re wrongfully in student loan tax offset

You can prevent the offset from occurring right away by taking the following steps. You’ll need to have your documents in order and proof for whatever objection you may be claiming.

1. Act on your right to review documents

Requesting a review when you get the notice is the first step to mitigate this process. You’ll need to request a review of documents with the contact listed on your notice. It must include your Social Security number. You must also identify the debt for which you want records and include a reasonable description of the records you want to receive.

The review is done by the U.S. Department of Education and the listed contact. Your right to review will also be listed on the notice. Don’t wait to complete this process.

2. Contact the agency who’s currently holding your loan

Next, talk directly to the agency you owe money to. This is listed on your notice as the contact. It may be the loan servicer or collectors from a debt collection agency if the loan is in default. Let the loan providers know you requested a review of certain documents. Also let them know what’s going on with your loans and that you’ll be sending in a Treasury Offset Program review form to object to the cost.

3. Complete the Treasury Offset Program (TOP) request for review form

You can have a review of your objections to the collection of the debt by making a written request for review. This is different from requesting a review of your loan documents and should be done after you’ve made a request for the loan documents.

You must do this within 65 days of the Debt Statement’s date. If you requested documents from the listed contact within 20 days of the date of the Debt Statement, you’ll have 15 days after the date the documents were mailed to request a review, even if that would push your request outside the 65-day period.

To do this, you’ll need to fill out a Request for Review form. Your loan holder should be able to provide this for you along with any pertinent instructions. Enclose the requested documentation to support your points. If you’re successful with the review, your offset may be reduced or not happen at all.

While it’s a process to get a student loan tax offset refund, it could help you financially. If you find you’re having trouble navigating these waters, you may consider hiring a student loan lawyer, as you have a right to have representation through this process.

Other than an outright objection, you may be able to request a tax offset refund due to economic hardship.

You can request a student loan tax offset hardship refund

If the removal of your refund will directly cause your family extreme financial hardship, you can also request a student loan tax offset hardship refund. However, the hardship must meet certain eligibility requirements.

It’s important to clarify that financial hardship isn’t a reason not to be in tax offset. At the same time, financial hardship could help you get a refund for the tax offset.

How does a student loan tax offset refund help you?

You can make a request for this refund whether your tax return has been taken out already or not. And if your request for student loan tax offset hardship is accepted, you can have the money back in your pocket to get out of the situation you’re in.

With some companies, such as the Educational Credit Management Corporation (ECMC), you’re only eligible for one offset hardship. If you’ve been approved for a hardship in the past, you may not be eligible to apply again.

Qualifications for student loan tax offset hardship refund

Financial hardship is more than not affording your student loan payments. It must be a serious financial situation. The following have been approved as grounds for financial hardship:

• Exhausted unemployment benefits
• Eviction notice or foreclosure
• Utility disconnection or shutoff
• Homelessness

You must submit the required documentation for each of these. If you’re eligible, take the proper steps to apply for student loan tax offset refund based on hardship.

4 steps to request a student loan tax offset hardship refund

If you know you’re in financial hardship — like the cases listed above — you’ll want to file a form and see if you can get some or all of your tax refund back.

1. Find your contact to submit the request

Your refund was most likely offset by a guaranty agency or the U.S. Department of Education. You can find out for sure by logging into the National Student Loan Data System or contacting the Treasury Offset Program.

Make sure you know you’re going to have your tax refund offset before submitting any kind of form.

2. Locate the form and check the requirements

Once you know who to contact, find the proper form to submit to get a tax offset refund.

Be sure to look over the agency's qualifications for financial hardship. For example, you may need to be on a repayment plan before submitting the form. If you entered a repayment plan after receiving your tax offset notice, you should be set. If not, you need to reach out to your agency and request to be put on one.

3. Collect your documents and proof

You’ll need to provide proof of your financial hardship. This will vary depending on your hardship. The required documents should be listed on the form.

4. Submit copies of the documents

Submit your form and required documents. Be sure to include only copies, not original documents, as you most likely won’t be getting them back.

The TOP hasn’t set a limit for how long it could take to get your tax offset refund. Continue to follow up as needed.

What to do if your tax offset refund request is denied

If your tax offset refund is denied, you’ll need to take some steps to make sure you’re not undergoing tax offsets in the future. This includes getting on a repayment plan as soon as possible, even if you’re successful at getting a tax offset refund. You have seven days from the date of denial to get on a repayment plan.

Ways to avoid a student loan tax offset

You can avoid a tax offset by keeping your student loans out of default. When you stop making payments, your loan initially becomes delinquent. It takes about nine months of missed payments before your loan is put into default status.

The consequences for defaulting on your student loans are severe and go beyond not getting your income tax return. Avoid all of this hassle by making your payments on time.

You can get on an income-driven repayment plan that takes into account how much you make. You could also consider consolidating or refinancing your loans into one new loan to simplify your payments. If you’re really struggling to make payments, consider starting the process for deferment or forbearance.

Free help to fix default problems

You'll want to call the default resolution group at the Department of Education. Their number is 800-621-3115. You'll want to compare getting loan consolidation versus opting for the rehabilitation program. This is only for federal loans.

You're only eligible for rehabilitation once. You make nine consecutive payments of generally 15% of your income, and the good news is that rehabilitation can take the default of your credit report.

Consolidation is another option. You can use that to create a new loan with the government and sign up for something like REPAYE (Revised Pay As You Earn) and pay 10% of your income.

If you have any questions or want to share what's going on with your situation, leave a comment below. That's another great way to get free help.

Paid help to fix default problems

If you have private or federal loans in default you might want to contact a student loan attorney. They will be able to explain all your options for a fee. This is a good option if you've been in default for a long time and know you need to get out of it but don't know where to start.

Student Loan Planner® offers paid consultations for a few hundred dollars regarding what to do with your student loans. The consult is a good fit for you if you only recently went into default on federal student debt and want a long term plan how to manage it from a CFP®, CSLP, or CFA professional.

You have options to manage your student loan debt. Avoid a tax offset entirely by getting your loans under control.

FAQs

How can I get my student loan out of default?

To get out of student loan default, you have two options. You can either pursue loan consolidation or loan rehabilitation. Contact your loan holder to take action and get out of default.

How do you get student loans forgiven?

If you are a federal loan holder, you can get your student loans forgiven. Student loan forgiveness is available through Public Service Loan Forgiveness (PSLF) or income-driven repayment (IDR). Talk to your loan servicer to discuss your options.