Often times, you’re not in the financial position you thought you’d be after graduating college. Maybe you didn’t find a job right away, or ended up with a lower salary than you were expecting.
Either way, it’s been harder than you anticipated to make ends meet. You’ve pushed your student loan payments aside for a couple of months to make sure you can pay your rent.
But now your tax refund was taken.
How did this happen? And how can you make sure it doesn’t happen again?
Keep reading to learn how to stop student loans from taking your taxes.
In this article:
- Student Debt at a Glance
- What Does It Mean If Your Loan Goes Into Default?
- The Government Wants Their Money Back
- Tax Refund Offset Reversal
- How Does the Treasury Offset Program Work?
- How Can You Stop the Government from Taking Your Taxes?
Student Debt at a Glance
Did you know that student loan debt is the second highest consumer debt? It’s second only to mortgage debt.
Reports suggest that there are 44 million student loan borrowers in the United States. Combined, they owe a total of $1.3 Trillion.
These numbers have more than doubled since 2009. And while they’ve been flying high, other household debts have fallen by 1%.
The last thing you should do is ignore your student loan debt. Falling behind on your payments will have an affect on your balances and the government will seize your tax return for repayment.
What Does It Mean If Your Loan Goes Into Default?
If you fail to keep up with the repayment of your student loan for 270 days, it will go into default.
You know defaulting on your student loan isn’t a good thing. But what exactly does it mean for you?
If you default on your student loan, you can expect the following:
- The entire balance, including interest, is due for payment immediately.
- You lose eligibility for financial assistance, including financial aid and forbearance.
- A collection agency will handle your loan.
- The default status will have a negative impact on your credit score.
- The effects of default will be felt for years while you try to repay your debts and rebuild your credit score.
As a result of defaulting on your student loan, your tax return can be taken.
You will receive notice that the creditor has submitted the debt for an income tax offset. This notice will be sent to the address held on record by your loan servicer. It may also be sent to the address you last used to file your taxes.
The Government Wants Their Money Back
If you default on your federal loans, the government will legally try to reclaim the money through the use the Treasury Offset Program.
The U.S. Department of the Treasury uses this program to collect on delinquent federal loans and pay off your federal student aid owed to other federal agencies.
The U.S. Department of the Treasury can seize up to 100% of your income tax refund which they use this to pay off your defaulted federal student loan.
Tax Refund Offset Reversal
So your tax return has been taken, but you didn’t think you were in default.
What do you do now?
You have the ability to appeal the tax offset.
Here are the grounds for doing so:
- You’ve paid off the debt.
- You don’t believe the loan is in default.
- There is cause for discharge or refund.
- Disability or death
You must submit your appeal, in writing, up to 65 days after the date of the notice. If you submit an appeal after 65 days, they will not suspend the offset process.
If your appeal is successful, they will return your tax refund to you.
How Does the Treasury Offset Program Work?
The Bureau of the Fiscal Service’s Debt Management Service (DMS) administers the Treasury Offset Program (TOP). The Fiscal Services DMS handles collecting money owed to federal agencies.
Fiscal Services also distributes federal payments (such as tax returns) to individuals. They do so on behalf of agencies making federal payments (such as the IRS).
Payment vouchers are prepared, certified, and then sent to Fiscal Services (FS). The vouchers contain vital information, so they include the name of the borrowers and their Tax Identification Number (TIN).
FS will cross-reference the recipient’s name and TIN with their delinquent debt database. If the recipient’s name and TIN match the name the TIN the creditors have, then the disbursing officers will withhold (all or part) of the payment.
FS will then offset and distribute payments to the recipient’s creditors. The goal is to clear the recipient’s debts. This information will be held on record and payments will also continue to be offset until the creditors suspend or terminate further payments.
Payments are suspended in the event of bankruptcy or other reasons the creditor feels justifies the suspension. They are also terminated for the following reasons:
- You’ve paid off the debt.
- Debt is discharged or compromised.
- Other reasons the creditor feels justify the suspension.
The best way to avoid this is to not default on your loans. To avoid defaulting on your loan, you will need to:
- Keep up with your loan repayments.
- Keep your creditors informed.
- Consider debt consolidation or rehabilitation
- Contact the Internal Revenue Service (IRS)
How Can You Stop the Government from Taking Your Taxes?
Worried about the government coming after your well deserved tax refund?
Follow our tips and advice below to keep your money in your pocket.
Keep Up with Loan Repayments
The key to staying out of debt and avoiding default is to make your loan repayments on time each month. To stay on top of your payments, you will need to prioritize your debts.
List out everything you owe and put them in order from the highest priority to the least.
Ideally, you’ll be able to pay all of your creditors every month. But, if you have to choose between paying your mortgage or throwing money at a credit card balance, you should know which is more imperative.
As long as you keep up with the payments on your student loan, the government will not be able to take your tax return.
Keep Your Creditors Informed
If you do find yourself unable to keep up with your loan payments, contact your creditors right away.
If you are struggling to make your student loan payments, then you have a few options.
Consider changing to an income-contingent repayment plan. If you qualify, you might reduce your monthly payments.
You can also consider deferment or forbearance.
Deferment delays payment and interest on your student loan providing you meet the eligibility. Forbearance allows you to stop making payments or reduce your payments for a period of up to 12 months.
These are just a couple of routes you can take when making your loan payment in full just isn’t possible.
The most important thing is to contact your creditors right away. They are much more willing to work with you if you’re up front and honest.
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— Get Out of Debt (@getoutofdebtcom) May 25, 2018
Consider Consolidation or Rehabilitation
An easy way to keep track of all of your student loans is to consolidate them.
Consolidation is the process of paying all of your current debts off with one new consolidation loan.
This way, you’ll only have to keep track of one monthly payment.
Consolidation makes repaying your student loan more manageable. In effect, you’ll only have to deal with one creditor.
Rehabilitation is more complex than consolidation.
In order to remove the default status from your student loan, it must go through rehabilitation. During rehabilitation, you’ll make 9 consecutive on time payments that equate to 15% of your discretionary income.
Rehabilitation will bring your loan current, and consolidation will help you manage it more effectively. By removing the default status from your loan and paying on time every month, you won’t have to worry about your taxes being taken.
Contact the IRS
Before the federal government seizes your tax return, they must notify you.
Once you receive that notice, you have 65 days to appeal the tax offset.
In order to appeal the tax offset, you will need to contact your creditors directly.
If you do not receive notice of the tax offset, or if you have any questions, then you can contact the IRS directly.
If you are successful at appealing your student loan garnishment, then you will receive your tax refund.
Student loan debt in America is a huge crisis that’s only getting worse, with the amount of debt doubling since 2009.
Falling behind on your student loan payments and slipping into default means the government can, and will, come after your tax return.
By following our guidelines, you’ll stay out of default, and keep student loans from taking your taxes.
Do you have questions or advice on how to stop student loans from taking your taxes? Comment them below!