Learn How to Challenge and Avoid Student Loan Tax Refund Offset

If you obtain a notice of tax refund offset for a student loan, you can challenge it on various grounds.

Did you know that defaulting on your student loan could have serious consequences? If you fall into default, you put yourself at risk of having your tax refunds taken away by federal and state authorities.

How Does a Tax Refund Offset Happen?

Computer Records of debtors who have defaulted on their student loans are sent to the IRS. The federal revenue agency takes all or a part of the individual’s tax refunds and applies it to student loan debt. If you file a joint tax return, the IRS may even hold your spouse’s income tax refund.

The Department of Education initiates requests for tax refund for any of the following two reasons:

1.    Student Debt that is due to or guaranteed by the Department of Education
2.    Student Debt that is due to private lenders or guarantors who have contacted Department of Education

The IRS will send you an advance notice of the proposed tax offset, including the amount and nature of the outstanding debt. When you receive the tax offset notice, you can:

•    Request to inspect and copy student loan records within 20 days of receiving the notice,
•    Request to review the proposed tax offset within 65 days of receiving the notice or 15 additional days if you have requested to inspect your loan records

You must appeal directly to the Department of Education, if you want to review the proposed tax offset.

How to Challenge a Tax Refund Offset?

When sending a request for review, you must include your name, social security number, loan amount and a written objection to the debt. You must also specify whether you want to request a hearing in person, online or by telephone. Some of the reasons for which you can object to tax refund offset include:

* Student loan amount is already paid by you
* Student loan is cancelled or discharged in bankruptcy
* Mistake in crediting you with the student loan
* Wrong loan amount is posted in the notice
* Refund of student loan due because of closed school discharge or false certification discharge
* Borrower of the student loan amount is dead or permanently disabled
* Have entered into a written agreement with creditors to pay off the loan amount

How to Avoid Tax Refund Offset?

Generally, it is very difficult to get out of a tax refund offset. You can lessen the chances of tax refund offset by entering into a written agreement with your creditors or guarantors for repayment, consolidation, rehabilitation, or deferment of your student loan debt. Some ways to avoid the student loan tax refund offset include:

a. Repayment of Student Loan Amount

One way to avoid tax refund offsets is to pay the student loan amount in full. You can either pay the loan amount due under the original terms of condition or under a revised repayment plan. The repayment plans range from standard and fixed amount payment plans to income specific and income contingent payment plans.

b. Consolidation of Student Loan Amount

Another option to avoid tax refund offset is to consolidate your student loans. Student loan consolidation merges all your student loans into a single loan. The advantage of consolidating your loans is lower monthly payments in paying off the loans. Most federal student loans are eligible for consolidation. Two of the most popular student loan consolidation program includes:
•    Pay As You Earn (PAYE) and
•    Income Based Repayment Plan (IBR)

PAYE repayment plan is available for all loans availed on are after Oct. 01, 2007. Although it is the most generous loan consolidation plan, not every applicant qualifies for the program. The IBR student loan repayment plan adjusts the monthly loan amount based on what you earn. The payment amount can be as low as zero dollars if the discretionary income is not enough to meet the minimum monthly payment amount.

c. Rehabilitation of Student Loan Amount

Rehabilitation of your student loan is another option that you can consider to avoid student loan tax refund offsets. Under the loan rehabilitation program, you have to make around 9 voluntary payments of an agreed amount over a ten month period. This allows you to get your loan in good standing and avoid tax refund offset. Once the rehabilitation period is complete, you will have to make payments according to original terms and agreement of the student loan.

d. Deferment of Student Loan Amount

Finally, you can apply for deferment of the student loan to avoid tax refund offsets. During the deferment period, you do not have to make any payments on your loan amount. You may be eligible for deferment if you are:

•    Attending a rehabilitation program for disabled individuals
•    Enrolled in a graduate or post graduate fellowship program
•    Facing financial hardship
•    Unemployed and seeking a full time job

To find out more or to avoid tax refund offsets, visit the Student Loan Relief Project and get your free consultation.

Group of college students studying at campus

What Can You Do If Your Student Loan Amount is certified for Student Loan Tax Refund Offset?

Like most people, graduation may be the most memorable occasion in your life. You studied hard to keep up your grades; you sacrificed your time to complete your course work; and you may even have had to go through the process of availing your student loan to cover all your course fees. All this effort culminates in achieving a college degree on graduation day!

However, the warm feeling of finally earning a degree wears off quickly once you find yourself surrounded by huge pile of student debt. Most loan repayment plans commence about six months after graduation. But finding a job with a salary high enough to pay the loan installment amount due is not an easy task. It takes most graduates quite some time to secure a decent paying job. Unfortunately, all too often the defaulted loan ends up on the desk of a debt collection agency.

Some Student Loans Become Certified for Tax Refund Offset

In the U.S., the Department of Education (DOE) refers all defaulted student loan debt claims to the Department of Treasury. The treasury department can request the IRS to offset the loan amount against federal and/or state tax refunds. Tax refund offset means that your state or federal tax refunds would be used to make payments of the student loan amount that is due.

Once the DOE requests the treasury department to collect student loan due from the delinquent borrower, the defaulted student loan becomes certified for tax refund offset. The certified status remains as long as the student loan amount remains due from the borrower or it is legally discharged in the event of bankruptcy.

The certified status of the student loan cannot be made void by making voluntary payments in lieu of the loan installment amount. You may offset the certified student loan tax offset status through payment of the loan amount in full, consolidation, rehabilitation, or settlement for partial payment or cancellation of the loan amount. In other words, the delinquent borrower would have to bring the student loan due back to the current status if he or she would like to remove it from the certified tax refund status.

How Can I Check If My Student Loan Amount Is Certified For Tax Refund Offsets?

Under the current U.S. laws, you would receive a tax refund offset notice from the IRS at the specified mail address. You can then file a request with the Department of Education to review your tax refund status. However, in case you have not updated your current address with the IRS, you may not receive the notice of the student loan tax refund offset.

You can check the status of your federal student loan payable by contacting the Department of Education directly. The DOE will refer you to the assigned debt collection agency that currently holds your debt. You can also contact the Treasury Offset Program (TOP) call center to know whether you student loan amount is certified for tax refund offset.

Department of Education’s customer service number: (800) 621-3115
Treasury Department’s designated offset call center: (800) 304-3107

You can also contact a student loan consolidation agency to discuss various student loan repayment options.