While Democratic Presidential candidates like Warren and Sanders are busily touting their student debt forgiveness plans for the future, the reality is, people are struggling today. No matter how bad the student loan crisis gets, it’s up to each of us to figure out how to ditch student debt so we can move on with our lives.
For some people, that might mean living like a pauper and throwing all extra money toward student loans until they disappear — even if the process takes years. For others, relief could come from existing programs that lead to forgiveness including income-driven repayment plans or even Public Service Loan Forgiveness (PSLF).
Unfortunately, one segment of student debtors is hurting more than the others wrapped up in the student loan crisis. Borrowers who are in default on their loans are susceptible to myriad consequences ranging from damage to their credit scores to wage garnishment, withholding of Social Security, losing their tax refunds, and all subject to collection fees that could be as high as 25 percent of the principal and interest of their loans — even as more and more interest accrues.
Getty
How Tax Offsets Work
Sadly, for those borrowers struggling, the government is in the business of confiscating tax refunds from student borrowers who are severely delinquent on their student loans. This is the result of the Treasury Offset Program, which was created in 1986 and is overseen by the Bureau of Fiscal Service. This program allows departments of the federal government to ask the Internal Revenue Service (IRS) to seize tax refunds for the purpose of debt repayment toward state or federal governments.
Please be aware: You do not have to grant the government permission to withhold your tax refund and use it toward your student loan debt. If a tax offset occurs, the government can divert your entire refund toward your student debt whether you like it or not. If any amount remains after your debt and all applicable fees and interest charges are paid off, however, you’ll have the difference returned to you.
Other details you should know about tax offsets include:
- If you’re married and you file taxes jointly, the IRS may take your entire tax refund regardless of whether your spouse has any student loan debt of their own. However, it may be possible to get your spouse’s portion of the refund returned to them if you file an injured spouse claim form (IRS form 8379).
- There is no statute of limitations on federal student loans, so a tax offset can take place every year until your entire student loan balance is gone.
- The IRS is legally required to notify you by mail if they plan to confiscate your tax refund, and you have some time to respond. Generally speaking, you have three options — you can challenge the offset, agree to pay the debt you owe, or do nothing at all.
How To Stop Garnishment Of Your Tax Refund
The first thing you should know about student loan tax garnishments is the fact that this only happens if you’re sufficiently in default on your student loans. In other words, the government won’t take action to confiscate your tax refund if you are on a repayment plan and making on-time payments on your loan, and that’s true regardless of how much student loan debt you owe.
You’re considered in default on your student loans once you don’t make your scheduled student loan payments for at least 270 days on loans made through the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program. For loans made within the Federal Perkins Loan Program, you could be considered in default on the first day your payment is late.
Either way, this is where the problem begins — with default. Not only can your tax refund be confiscated when you’re in default on federal student loans, but you could face other consequences as well. According to the U.S. Department of Education, default can also lead to:
- The entire balance of your student loans becoming immediately due in full through “acceleration”
- No longer qualifying for deferment or forbearance
- Disqualification for federal student aid
- Damage to your credit score
- Wage garnishment
- Court costs and collection fees
- Withholding of your college transcript from your school
In other words, having your tax refund taken against your will is just one problem you’ll face if you let your student loans creep into default.
This also means that, to protect yourself from tax offsets, you have to avoid default or get your student loans out of default. According to financial attorney Leslie Tayne of Tayne Law, there are three main strategies you can use to get your student loans out of default, including:
Repayment in Full
Tayne says this is the quickest way out of default, although “this is generally not an option for most borrowers because you would likely not be in default in the first place if you had that ability.”
However, you may have a loved one who is willing to lend you the money to pay the loan off in full, so you can get out of default and preserve your financial future. Of course, you would need to pay your loved one back, which creates another set of problems, says Tayne.
Loan Rehabilitation
Tayne says that, in loan rehabilitation, you will sign an agreement with your loan holder stating that you agree to make nine consecutive on-time payments. The monthly payments will be 15 percent of your discretionary income, and you will need to provide documentation of your income to the loan holder.
“If you complete these nine payments, your defaulted status will be removed, and you will avoid tax garnishment,” she says. “You’ll once again be eligible for all of the benefits associated with your loans, including deferment and forbearance, and the rehabilitation status will be removed from your credit report.”
Loan Consolidation
Consolidating your federal loans into a Direct Consolidation Loan is another option for getting out of student loan default. However, when you consolidate a defaulted loan, you must either agree to pay the new loan through an income-driven repayment plan or make three consecutive on-time monthly payments on the defaulted loan before you consolidate.
“If you choose this option, you can then pay the consolidation loan using whatever repayment method you find suitable,” says Tayne. But if your wages are being garnished as a result of being in default, the garnishment must be lifted before you can consolidate the defaulted loan.
The Bottom Line
If you hate the idea of losing your tax refund, you’ll need to get your student loans out of default. The suggestions made above can help you in that effort, but you’ll need to do some research and work upfront if you hope to fix your situation before it gets worse.
Also know that, if you choose to do nothing, everything will get infinitely worse. Student loan debt won’t be forgiven on a massive scale any time soon, and we all know student loans are nearly impossible to discharge in bankruptcy. However, taking steps to get out of default and into a more reasonable repayment plan can help you get back on track.
