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?

  5. If you received the earned income tax on your filing and you file an amended return and decline the EIC credit?

  6. Tony brown says

    I went to a school tesst college that closed or changed to brightwood which was close as well it was around 18k I was a war of the state so I only had to pay 10k this was 2011 when i finished I been paided they also took my 2013 taxes of over 4K I only get paid 10.10 hr with a teenage daughter how do I get my taxes back after they have been already offset 2/27 but no agency have a record both ccu and irs are say they were paid what to do

    • Tay Mayers says

      Tony I’m going through the same thing. Smh. Please keep me in the loop if you were able to find a result

    • Any updates guys? am also a father of teenage daughter and got blindsided by this I had no knowledge of me owing the loans since I also have a felony and couldn’t even take the test to get certified when finish with the program. Also Kaplan then turned Brightwood closed down in my city and have nowhere physically to go to get information. Pls help I put a stop and forbearance or stop collection so hopefully something gives. I heard some do the same thing and got the refund back but I don’t know if I did it too late!? Any advice would be highly appreciated!

  7. Larry Ritchie says

    My $12, 000 tax check was taken this year because of my wife student loans and she had had disability forgiveness and she’s on for multiple sclerosis well what happened was she was diagnosed with a astrocytoma brain tumor while the Social Security office kicked her off Social Security so she was we didn’t know it came back on us long story short I filed 83-79 for the injured spouse but I got my transcript and it says the money was taken on the 22nd of February but it’s not going to be applied till 3: 11 of 2019 why would they not give it to the Department of education’s right away why is there a wait until the 11th of March is there a way I can get this back

  8. Nicole King says

    Dept of EDU took my return on 2.21.19, after I paid off the debt 100% on December 13th. They are not answering phone calls, or responding to emails. I call and get disconnected. They did not have the right to take my return, what do I do now? I had no offset warning, and I need that money. Any advice would be great..

  9. I went in to default on my student loan in the end of 2018 . I was eligible for hardship services and for my entire federal tax refund I set up the minum payment
    ( because im broke) of 5$ monthly well the dept. of edu. said wait at least 4 week after i recive my notification letter which was Feb.15 2019 . I waited and after 5 weeks i called the federal offset program number (800-304-3107) the offset was still in place . So i talked to some one at the treasury department they said the same as the robot of the offset info # and they can’t tell you how long because even they don’t know . Also i called the ecmc and they said im good on their end and i was waiting on the treasury departments system to catch up . So now its the end of may 2019 and im still waiting on the removal of the offset

  10. In tax year 2018 my loan servicer ECMC sent me a letter stating that they would inform the Dept of Education not to offset any federal tax refund. In the letter they gave the TOPS phone number. I called that number and was told via electronic message that there was no offset and I was not in their database at that time. Well, our joint tax refund was offset and we still have to file the injured spouse form. The Dept of Education sent me a letter after we filed the injured spouse form telling me it would be offset and they gave me some # regarding this. Not a phone number, seemed to be an offset #. The refund was returned as it should have been but it was a bit confusing to be told one thing by ECMC and then something else by the govt. This year we filed the injured spouse electronically WITH our tax returns. Figured the govt will still try to hold it, so going forward with that form and hoping it won’t delay things even more. This year the TOPS database still says there is no obligation on my SS number ..so did they remove me from the TOPS database and if so how then is the IRS withholding our refund unless the Dept of Education has some backdoor with the IRS.

  11. Nicole D Brown says

    I had my student loan taken from my federal tax return last year. Now after they took the money they are saying they sent me a refund back that I never recieved and then sent it to another collection agency! How are these crooked people getting away with this? I am a struggling mom of 4 this is insane.

    • I am trying to get mine too. I was told have 30 days from date they got my refund (3.6.20). I want to know are they going to work with people since the Coronavirus has knocked out my chance to get proof of pending eviction. I also asked DOE how they can have eviction or foreclosure as hardship but tell people it can take 30 days or more to process refund request!!

  12. My husband filed our taxes for 2019 he was the only working adult besides the almost $1000 I made right before we went through the midwest March 2019 flood. I was 5 months pregnant so with the flood and being displaced from our home I stopped working. So the income made in 2019 was made by my husband. Anywho he filed marriage jointly. 2 dependents daughter 6yrs old son born 7-10-19. Submitted our taxes like we do every year and today I check our refund status and it states that our whole federal return is being applied to my delinquent student loans. Not my husbands debt. I had this before we met. I nor my husband recieved a letter for this offset ahead of time informing us that our return would have a offset??? My husband could have filed injured spouse form to protect his return. Anyways my question is are they legally suppose to inform me first of this offset and would it be a waste of time for my husband to send in a injured spouse form? Would he still be able to recieve his portion which 99% of it was his since I only made around $1000 last year. We were counting on this income to help us finish recovering from the flood and to catch up on our mortgage and utilities. Please tell me what my options are so my husband can at least receive some of the return back. Also we did qualify for the child tax credit and the earned income tax credit.

  13. How long does it typically take to receive a response once you file a claim for tax offset hardship for student loans? I’m currently getting evicted. I’ve sent in all required documents including proof of eviction. It’s been 10 days I haven’t heard back regarding anything? Anyone go through similar and can help ?

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