Offset of Tax Refund to Pay Student Loan Debt

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I mentioned recently that many comments have been made on the blog in the past few weeks in response to a post I wrote over two years ago regarding offset of tax refunds to satisfy other state and federal debts. Almost all of the comments to the post were written by individuals who had their 2017 refund taken to satisfy an outstanding student loan debt. Because of the volume, I asked my wonderful colleagues at the Legal Services Center of Harvard Law School who run the Project on Predatory Student Lending of the Consumer Law Clinic if they would write something that might guide individuals in this situation in trying to address the offset of their refund by the Department of Education. Toby Merrill, the director of the Project, and Alec Harris, an attorney working on the Project, have written a post that might be especially useful to the many non-tax professionals who wander onto our site from a Google search. The information may also be helpful to tax professionals with clients facing this problem. Keith

The U.S. Department of the Treasury collects debts owed to other federal agencies (and even state governments) by seizing taxpayers’ federal tax refunds. This process is known as “Treasury offset.” The federal agency that collects the most money by Treasury offset is the U.S. Department of Education, which uses offset to collect defaulted federal student loans. With tax season approaching, this post covers some basic information about how the Treasury offset process works for federal student loans, and what can be done to stop it.

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How to find out if a federal tax refund will be taken

The Department of Education does not give much warning about offset. The Department only provides a single notice of Treasury offset before it occurs. This notice should come in the mail, and usually gets sent in late summer. After that first notice, the Department of Education will not give another warning about offset before it occurs ever again, even if offset occurs in multiple years. (It will, however, send a notice after it has already taken a person’s tax refund, each time offset occurs, when the person is in a much worse position to do anything about it.)

The IRS hotline, (800) 304-3107, will confirm whether someone’s tax refund will be taken to pay their defaulted federal student loans. This is an automated number that can say whether a tax refund is “certified” for offset (meaning the refund will be taken) and, if so, which agency is going to take it (student loans will be reported under the “U.S. Department of Education”).

What to do about a notice that the federal government intends to take a refund

A person who receives a notice that the government intends to take their tax refund to pay their student loans has 65 days to request a hearing. If the person requests a hearing within 65 days of the date of the notice, the offset will be put on hold during their challenge. If they make the request later, they might still get a hearing, but the offset will go forward in the meantime. This page has more information about requesting a hearing, including some of the reasons that may stop the Department of Education from taking a tax refund—for example, that the loan was already repaid, that the debt is someone else’s, that the taxpayer is making payments pursuant to a repayment agreement, that the taxpayer is completely disabled, or that the loan is not enforceable.

Another way to avoid offset besides requesting a hearing is by entering a written repayment agreement within twenty days of getting the notice, and starting payments right away. It is important to negotiate for a plan that is reasonable and affordable.

Financial hardship is not an officially recognized reason to contest an offset, but the Department of Education might nonetheless consider a request based on extreme hardship, which it generally limits to cases of imminent eviction or foreclosure.

What to do if a refund has already been taken

When a tax refund has already been taken, it is very hard to get back.It is permissible to submit a hearing request even though the one-time, 65-day review period has passed (see above), but this does not guarantee a hearing. If the taxpayer does not owe the loan, they may consider challenging the offset in court by bringing a lawsuit against the Department of Education.

If the tax refund was taken to pay a spouse’s defaulted federal student loan and the spouses filed jointly, then the non-defaulted spouse can get back their part of the joint refund by filing an injured spouse claim with the IRS. Be aware that if the government grants the injured spouse claim, it will add the amount refunded back to the outstanding loan balance of the defaulted spouse.

How to stop future offsets

The simplest way to avoid tax refund offset is to get student loans out of default. Once federal loans are out of default, they will no longer be eligible for offset. The two main ways to get federal student loans out of default are consolidation and rehabilitation. More information about both of these processes is available here.

Neither consolidation nor rehabilitation is immediate, although consolidation is faster. If defaulted student loans are being collected by wage garnishment (as well as Treasury offset), then they cannot be consolidated right away. Treasury offset remains possible until these processes finish and the loans are no longer defaulted. A taxpayer can request an extension to file their taxes to avoid filing a tax return until their loans are out of default and their tax refund is safe from offset.

In addition, a person can avoid future tax refund offsets by getting their loans discharged. This page has more information about various discharge options for federal student loans. In some cases, applying for a discharge can provide protection from offset while an applicant waits for a discharge decision, but these protections are not reliably applied, and an applicant may consider seeking an extension to file their taxes while their discharge application is processed to protect their tax refund.

 

 

Comments

  1. Norman Diamond says:

    “The Department of Education does not give much warning about offset. The Department only provides a single notice of Treasury offset before it occurs.”

    Defaulted borrowers are luckier than taxpayers. The IRS can seize an overpayment to offset it against an alleged tax debt, give no notice at all before it occurs, and give a single notice afterwards. Wait, it gets better. The IRS can seize an overpayment to offset it against an alleged tax debt which has already been proven not to be owing, give no notice at all before it occurs, and give no notice afterwards.

    “If the taxpayer does not owe the loan, they may consider challenging the offset in court by bringing a lawsuit against the Department of Education.”

    Do Low Income Tax Clinics assist? If not, do you really think a pro se taxpayer could get a judge to favour a law over the DOJ?

    “If the tax refund was taken to pay a spouse’s defaulted federal student loan and the spouses filed jointly, then the non-defaulted spouse can get back their part of the joint refund by filing an injured spouse claim with the IRS.”

    Right, Tax Court might be the only place where pro se taxpayers can get due process, when they have one of the limited varieties of cause of action and when the Tax Court’s ruling hasn’t become final. But all the IRS has to do is wait more than 90 days before acting, so that Tax Court lost jurisdiction when its ruling became final.

  2. Burton Smoliar says:

    Question: What happens if an overpayment is designated as an estimated tax payment for the following year’s taxes?

  3. Janula Hall says:

    What happens if you never even recived a notice or knew about the student loan and find out that the taxes were taken after the fact.?

  4. I am filing for a Loan Discharge-False Certification-Disqualifying Status. I had a felony conviction at the time that I took out federal loans for a Criminal Justice program of study. The positions for which I had enrolled in the schooling for all required a background check as a condition of employment.
    On the Discharge Application it asks for the specific referenced state statute. There is not, at least that I can find, anything that directly states that having a felony will prohibit someone from employment-although every position states that a criminal history background check is required. How do I address this on the Discharge Application?

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