Your unpaid student loan could cost you your tax refund

Your unpaid student loan could cost you your tax refund

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You anticipated a large refund on your taxes to pay off some bills and put some money away in a rainy-day fund. Unfortunately, the money never showed up. What happened?

Your refund may have gone toward an unpaid bill selected by the government your unpaid student loan.

Your federal student loan is considered to be in default if you haven't made a payment in 270 days. When that happens, the federal government has the right to claim your tax refund as payment against the debt, in a process known as an administrative offset. In essence, the government isn't giving any tax refunds back to you if you aren't attempting to repay what you already owe the government.

If you've lost a tax refund to an offset, you aren't alone. Student loan default rates are near 11%, giving the government plenty of offset targets. In fiscal 2017, the Treasury Department executed $2.6 billion in tax refund offsets on approximately 1.3 million defaulted student loans.

The Department of Education will notify the Treasury Department once your loan goes into default. The Internal Revenue Service (IRS) will follow up by sending you a written notification of the intent to garnish your tax refund. The notice will contain information regarding the debt and how to appeal the decision.

Refund garnishment can hit low-income student loan holders exceptionally hard. Lower-income Americans benefit from tax credits such as the Earned Income Tax Credit (EITC), and they can ill afford to lose them. For many of these Americans, college wasn't the ticket to higher wages just a ticket to higher debt without a suitable return on investment.

What should you do if you're faced with a notice of intent to garnish your tax refund? Start by reviewing the IRS notice to verify that all the debt information is correct and that you really do owe the money via default.

If the debt is not yours or there is a legitimate reason your taxes should not be withheld for example, you have already set up a loan repayment plan and are already making payments you can appeal the decision with the Department of Education. Instructions for appeal will be included in the IRS notice.

To put a hold on the offset while you appeal, you have to file a written request for review at the address on your offset notice. You have 65 days after the notice date to file. If you requested and received a copy of your loan file, your deadline will be the longer of 65 days after the notice to file or 15 days after the loan file was received.

Unfortunately, if the defaulted student loan debt really is yours, you don't have many options. You can apply for a hardship with the Department of Education, making the case that garnishment of your tax refund causes you excessive financial difficulties because of exceptional circumstances. However, the process can be very slow, and hardship is rarely granted.

The best way to protect your tax refund is to avoid default in the first place. The Department of Education offers many options for staving off default. Income-based repayment plans allow you to scale your payments to your discretionary income. If you're in a situation where you can't pay at all, deferment and forbearance options are also available.

When it comes to paying off your student loans, the worst thing you can do is nothing. "The best thing you can do about tackling your student loan debt is to be proactive," advises Millennial Money Expert Stefanie O'Connell. "Paying it back is not a passive practice." Rest assured, the government will do something like claiming your tax refunds until the situation is resolved.

Find out quickly at what rate you can refinance your student loan. For more of our exclusive student loan data and insights, visit Student Loan Crisis Series 2018.


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