How to Avoid a Student Loan Tax Refund Offset

How to Stop Student Loan Tax Refund Offset

It may come as a shock to many people if they are expecting a tax refund but instead face a student loan tax refund offset. Student loans are a sticky subject for many former college students.  Let’s look at the process to understand how to stop a student loan tax refund offset.

First things first, don’t default.

Student loan debt can be deducted from your tax refund. Yes, you probably already know that.  But if you did default, we get it and you are not alone.  The student loan tax refund offset process starts if your loan defaults. This means there have been no payments in 270 days and a payment arrangement hasn’t been made with the loan servicer.

Second, avoid a tax refund offset before it happens.

Oh, and it happens.  It happens to alot of taxpayers.  There is no statute of limitations on student loans.  This means they can essentially follow you forever! The good news is that there are different ways to avoid reaching the level where you end up with a tax refund offset to pay for student loan debt.

When can student loan debt be deducted from your tax refund?

The process for a student loan tax refund offset doesn’t typically start until fall. If your have defaulted on a student loan, a notice will be mailed either to the address last used to file taxes or that is on file with the loan holder. The notice gives you an opportunity to appeal the action.

How can you stop an offset for student loan from your tax refund?

The process generally will not be initiated as long as you contact the loan holder, make arrangements to repay the loan, or start a rehabilitation plan. It is very important to be proactive and try to work with the loan holder. So many people do not communicate or let their loan default, particularly if they haven’t been able to find a meaningful job since graduating. Many creditors will work with you if you let them know about your situation. They would rather get some money than no money at all. Don’t let it overwhelm you. If you find yourself struggling, reach out to the loan holder to see if there is anything that can be done before you default.

Can I appeal a student loan tax refund offset?

Yes. Grounds for appeal may include but not be limited to:

  • The debt is already paid off or should not be in default due to current payments.
  • The borrower is permanently disabled or has passed away.
  • The loan is not yours due to identity theft.
  • The loan was supposed to have been refunded by the school.

File your appeal within 65 days of receiving the tax refund offset notice if you feel you have legitimate grounds. If you wish to review the loan file, you must file that request within 20 days, and then file a request for appeal within 15 days after that. All requests must be in writing to the loan holder, whose address should appear on the relevant loan documentation. Requests filed in this time frame will halt the garnishment process while the request is reviewed. Be certain to keep copies of all correspondence you send and receive!

If you fit the bill, you’ll need to complete a student loan tax offset hardship refund form and provide proof of your hardship. You also can contact the Treasury Offset Program at 800-304-3107 for more information.

Here is a link for the tax offset form:

Consider deferment or forbearance

Paying your loans on time is the most important way to avoid an offset, but you might not always be able to do so. If you know you can’t make minimum payments on time, try deferring your loans. When your loans are deferred, you can postpone payments for up to three years.

You also can consider another federal repayment option: forbearance, which is similar to deferment but has different eligibility rules. Forbearance pauses your loan payments for up to one year. Keep in mind that interest continues to add up during the forbearance period.

Depending on your loans, interest also can accrue if you’re in deferment, so do your research.

Finally, don’t default.

Wait, didn’t we already say that?  It goes without saying, avoiding default altogether is the best way to avoid having your tax refund offset. You may be eligible for repayment plans that are pegged to your income level with a built in forgiveness component after so many years. Those payments may even be set to zero dollars if you are disabled and living on Social Security.

Do you have any experience reaching out to your loan holder? Tell us about it in the comments below!

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