If you’re still waiting for your tax refund but are far behind on your student loan repayments, you might want to rethink any big plans you had for spending your refund. That’s because there’s a good chance the government is going to apply that refund to your outstanding payments instead of sending it to you.
If you are in default on your federal student loans (late on your payments by 270 days or more), the Department of Education can take your tax refund using the Treasury Offset Program. This program authorizes the interception of federal payments — such as tax refunds or Social Security income — in whole or in part to pay debts owed to other federal agencies. There are some limited consumer protections, but debtors aren’t always aware of them.
Here are several things to keep in mind.
1. Heed the Notice
First, people who have student loans in default get a notice warning them in advance that they are at risk of having any potential tax refund seized for student loan repayment, Jay Fleischman, a student loan and bankruptcy attorney, told Credit.com in 2015. That notice contains instructions for a review of your loan information and how to avoid the offset.
2. Request a Hearing
If your refund is taken, you can still request a hearing. If it was taken in error, the money will be refunded. However, be aware what constitutes as an error does not generally include your not having received a notice. A successful hearing on your behalf would typically require you be able to prove your student loan was not in default.
The one case in which you are likely to be able to recover the money is if you filed jointly with a spouse, and it was his or her student loan that was in default. “You may be able to make an injured spouse claim,” said Fleischman.
3. Review Your Withholdings
It’s also a good idea to adjust your withholdings whether you’re subject to a tax refund offset or not, because a large tax refund means you overpaid your taxes during the year. If you are in default on your federal student loans, you probably need that money. But at this point, there is nothing you can do to change the overwithholding from last year. Still, revisiting how much you’re having withheld for taxes is a smart move for anyone who got a large refund.
4. Get Back on Track
The bigger problem is how you are going to deal with the default on your student loans from now on. You’ll want to get out of default and keep it that way. Fortunately, there are many payment options; you should be able to make one work for you. In some cases, income-based repayment payments can be set as low as $0. It might also be worth looking at whether you qualify to have some or all of your student loans forgiven.
There are some options for people who are behind on payments to get back on track, though, even if forgiveness isn’t an option. To get out of default, you can combine eligible loans with a federal Direct Consolidation Loan or visit the government’s default rehabilitation program. If you make nine consecutive on-time payments (the payments can be extremely low), your account goes back into good standing, and the default is removed from your credit report.
Defaulting on a loan seriously damages your credit score, and because student loans are rarely discharged in bankruptcy, the debt can beat down on you for decades. (You can see how your student loans are currently impacting your credit scores for free on Credit.com.)
More on Student Loans:
- How Student Loans Can Impact Your Credit
- Can You Get Your Student Loans Forgiven?
- Strategies for Paying Off Student Loan Debt