For anyone getting a refund, tax season is the best time of year. But for those who have defaulted on their federal student loans, their potential joy can be seized by the IRS to pay down the federal debt.
It may not currently be tax season, but it’s never too early to start preparing to secure that refund. Specifically, if you have federal student loans that you’re behind on, it’s in your best interest to get in good standing before the Department of Education decides to collect your tax refund.
If you’re worried about the IRS taking your tax refund, you’re in the right place.
Note: Stopping tax offsets takes 6-9 months for most people. If you're looking at this article right before filing your tax return, you might want to wait and get this process completed first.
If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
The Basics of Tax Offsets
First, tax offsets are legal. The Treasury Offset Program, created in 1986 and overseen by the Bureau of Fiscal Service, allows departments of the federal government to request that the IRS seize tax refunds to pay down debt owed to the federal or state governments.
Unlike for private loans, the federal government doesn’t need permission from anyone to garnish your earnings, including your tax refund, if you have defaulted on your federal student loans.
In the case of federal student loans, the Department of Education may send the Treasury a request to seize your tax refund to put toward defaulted loans. If they do this, they can take your entire tax refund. If the debt is paid off and any amount of your refund remains, it will be returned to you.
If you have a spouse with whom you file your taxes jointly, the IRS can seize the entire joint tax return, even if your spouse is not connected to your federal student loan. However, it is possible to get your spouse’s portion of the refund returned to him or her.
It’s important to note that, because there is no statute of limitations for federal loans, the IRS can offset your taxes for every year your federal student loans are in default.
Fortunately, the IRS is legally required to notify you by mail of their proposal to offset your taxes and allow you some time to respond.
If you have federal student loans that are in default, you may receive a letter in the fall notifying you that the IRS plans to take your potential tax refund and apply it to your education debt. The letter will include information about your loans and instructions on how to proceed.
Once you get the letter, you can do one of three things:
1. Request a review to challenge the offset.
2. Agree to pay the debt.
3. Do nothing.
Request a Review to Challenge the Offset
First, check all the information in the letter against your records and your loan accounts. You can even request an official copy of your loan information from the Department of Education. If anything looks incorrect, you have the right to request a review hearing, where you’ll have the opportunity to prove that your taxes should not be offset.
Here are some common reasons you might request a review hearing:
Challenging the offset can be difficult, so you need very compelling proof. If you’re set on this course of action, consider hiring a lawyer and the costs of doing so.
Agree to Pay the Debt
If you've agreed that you owe the debt, that doesn't mean that you are expected to pay all of it all at once. You certainly pay if all if you are able, but we're guessing that if you're here, you're not able to do that.
Instead, you can enter into a written agreement with the Department of Education to pay the debt. How will you pay the debt? First, you'll need to take steps to remove your loans from default. That could include default rehabilitation or consolidation.
After that, we suggest looking into federal repayment plan options so you avoid defaulting again in the future.
Of the various repayment plans offered by the Department of Education, borrowers who default would likely benefit most from income-driven repayment plans. In those plans, your payment amount is calculated each year based on your income and family size and can be as low as zero. Plus, after 20 to 25 years, any remaining balance is forgiven.
Of course, do thorough research before enrolling in any repayment plan. None of them are one-size-fits-all so make sure the one you choose works for your situation.
Do Nothing
If you choose not to take action, miss the deadlines to take action, or never received a letter warning you of the proposed tax offset, the IRS will take your tax refund. Thankfully, you’re not completely out of luck at this point.
If you believe your refund was taken in error, you can reach out to the Department of Education (not the IRS) to contest the offset. See the list above of common reasons to request a review hearing for the types of errors that would get your refund returned to you.
If your refund was not taken in error but you can prove financial hardship, you may be able to get at least a portion of the refund returned to you. This method is very difficult and is not guaranteed to be successful.
If you filed your taxes jointly with your spouse, he or she can file an “injured spouse” claim to get his or her portion of the tax refund returned.
Private Loan Tax Offset
If you have private loans and you fall behind, you don’t have to worry about not getting your tax refund; collectors of private loans have no way to seize the refund. However, your private loan servicer can take action to collect your loans much sooner than federal servicers can. Unlike federal servicers that can’t take collection action until loans are 270 days past due, private servicers can take collection action as soon as you’re late on just one payment.
If your private loans are delinquent, your private loan servicer can sue you for the ability to garnish your wages and freeze your bank account. Court approval is the only way a private servicer can take your earnings, so you have a much better chance of preventing it if you show up to court with a good defense.
How to Prevent Tax Offsets
If you’re approaching or in default on your federal student loans, it’s best to take action so they are not still in default come tax season. That means either curing the default through default rehabilitation or consolidation or entering into a repayment plan with more affordable monthly payments so you can work to stay current.
If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
We break down the process to get out of default here: How To Get Out Of Student Loan Default In 5 Easy Steps.
We'd appreciate hearing your thoughts and experience in the comments below.
Carmaletha Pointer says
So I called the offset number to see who I owe it says I only owe one dept and that’s child support but it didn’t say anything about my student loan am I safe
Robert Farrington says
If you have an offset (for loans or child support), they can take any Federal payment, including your tax return.
Latrice says
I have Tax topic 151 and I received my state taxes with no problem but they want me to call them with a reference number1242. I am confused
Robert Farrington says
Tax Topic 151 is due to a tax offset. IRS Error code 1242 is a freeze on your return. You need to call them and find out what’s up.
Lakeisha says
Just found out that I have a offset and my full refund was taken I did not get a letter in the mail, no warning that this was about to basically put me and my kids in a really bad spot. To the point that in 5 days we will be homeless. My question is I have all the documents that I need to do my hardship , and by the time they make a decision we will be out on the streets is there any way that this process to get my refund back go faster I am so scared I have 6 kids and one in oven. What should I do???
Robert Farrington says
That’s a terrible situation. You need to follow up on your offset and student loans. You need to then get out of default ASAP.
Crystal Thompson says
My defaulted student loans are being consolidated and I haven’t received a letter from the Department of Education last fall, so am I safe to file my taxes without them being taken?
Robert Farrington says
It depends on where you are at in the process. You sometimes won’t receive the letter until after the offset happens.
Jessica Scott says
I am currently in a rehabilitation program to get my loans out of default. I filed my taxes and they took my entire refund. I was never notified of the offset. Can they do that?
Robert Farrington says
Yes, until you have completed your rehabilitation agreement, you’re still technically in default. Sadly, you probably should have waited to file your taxes (since you filed pretty early).
Finish getting out of default, then you won’t have to worry about this in the future.
Precious says
If I’m in default but doing loan consolidation how long do it take to get out of default so i can file taxes?
Robert Farrington says
Every agreement is different, but typically about 3-6 months to be 100% complete and on a new repayment plan.
Dell McDonald says
My student loan is in default. My bankruptcy was approved last August and I am in the process of going through a rehabilitation plan with DOE. I initiated review of my expenses to determine a payment plan October 2017 and started sending them $20 a month (5 consecutive payments thus far). However, they have continually requested additional information. Hopefully, I receive the approval over the next couple of weeks.
The agent for the DOE noted that my pay should not be garnished nor should my taxes be offset. I’m hesitant to file my taxes as I do need this refund. What is the risk of filing my taxes now while they are determining my case vs deferring filing my taxes for another 9 months until I’m out of default/rehab status?
Robert Farrington says
If you’re expecting a refund there is no harm to you in waiting. If you owe, you need to file on time. I personally would be doing your taxes, ensuring that you get a refund, and then waiting. That way you know you don’t owe.
Jennifer says
I am starting the rehab program. I have already successfully done this with another student loan that was a state loan not federal. Now Federal loan is going after my tax return. I started to file my taxes and put them on hold. I called the DOE and they said unless I am facing eviction or foreclosure, I can not apply for a hardship. Is this true. Because last year I filed a Hardship with the State Loans and was able to get my full refund back.
Robert Farrington says
You won’t get any type of exemption to the offset. You need to complete rehabilitation first so get your refund.
Remember – tax refunds are also optional. You can adjust your withholding with your employer so you owe taxes – then you get paid more each paycheck and never have to worry about this again.
moni says
This situation sounds like mine. How can I get an extension ?they’re being offset. While I was in process of starting income driven payments. Now I’m making 90 dollar payments every month and afraid to do my taxes DOE told me I could request an extension and I will be in good standing until I finish 3rd payment then I could do my taxes in October and get my refund .is this correct ?
Robert Farrington says
You can file an extension with your tax software or with an accountant.
Chaney says
My big tax refund was taken after I found that out I filed to make payment arrangements and get me out of default they haven’t taken my little tax refund yet am I in the clear so I’ll get that back called depaprtment of education and they said they’ll only take it if it’s participates in a certain program allowing them to take both state and federal taxes is that true
Robert Farrington says
What do you mean big and little refunds? Do you mean Federal and state? They typically only take your Federal refunds, not your state refunds.
Bill says
I thought my student loans were in deferement and I have never received any kind of communication, written or electronic, that I was in default. Never received a letter about an offset from the IRS or the DOE but after my refund was supposed to be deposited and wasn’t there iearned of the offset. Am I not supposed to be notified of not only the offset, but that my loans were in default? My family is screwed.
Robert Farrington says
You should be notified, but that also assumes that all your contact information and such is correct. I would get a hold of your lender ASAP and see what’s going on.
Debra says
I did not owe a student loan went to court 2x and student loan did dismissal stating I owe nothing and still taking my tax return. I never heard of Loan tax offset. Question? will this work for me
Robert Farrington says
What do you mean? You mean your student loan was dismissed and you’re still seeing your tax refund taken?
Kelly says
I have been in the rehabilitation program for my student loans now for 3 months…I waited to file my taxes until now. Will they still take my federal tax return?
Robert Farrington says
You must complete your rehabilitation agreement fully before you’re out of default and “safe” to not have your tax refund taken. What does your agreement say? It’s usually at least 6 payments (months), if not longer.
Christina says
My student loan will be out of default in September. I filed for an extension for my 2017 taxes and the deadline is mid-October I believe and I will be filing then. If I am owed a refund, will it still be offset?
Robert Farrington says
Once you’ve completed your rehabilitation agreement complete, you should be fine.
Denise says
I just made my last payment for the rehabilitation program so how long should I wait to file my taxes?
Robert Farrington says
Until you’ve made your first payment under your new income-driven repayment plan.
Tammy shore says
My friend told me .. h&r block said they can only take your loans once every 3 years.. is this true??
Robert Farrington says
No, you can see your tax refund offset every year. But it gets worse – just because they take your tax refund, doesn’t mean it even goes to your loans. It usually just goes to collection fees and interest. So, your balance still grows.
You NEED to get your student loans rehabilitated. Read this: http://growth360tci.wpengine.com/15577/student-loan-rehabilitation/
Eboni Robinson says
Hello, i am currently on offset of 4thousand. And im currently on the program to get off of default which will be on june 26th 2018.then my stuff will be switched back to dept of edu.and im going to get on a payment plan with them. How long do i need to wait untill i can file my taxes before December without them taking my taxes?please help
Robert Farrington says
After you’re out of default and make your first payment under your new payment plan, you should be fine.
Kimberly says
Hi Robert. I hope you can answer a question that no one else has been able to answer. My yearly income is only about 30-32k. A few years back I encountered a financial hardship and my student loan went into default. As a result the IRS offset my tax returns. I haven’t filed any taxes for 3 years. I entered a repayment plan last year and as of this month my student loan is now out of default. My question is: When can I file my current and back taxes and get my full return without any money being offset? And is there a way I can confirm it will not be off set, before I file.
Robert Farrington says
Once you’ve made at least one payment you should be good to go. Make sure you consult an accountant to file your past taxes.
Katie says
Why do they take a 8000 dollars income tax,rather then a 3200 ?This person was in the porcess of getting the student loan cleared,was cleared.
Robert Farrington says
When you get your tax return offset, it doesn’t just go to the loan, but also to collection fees and interest. Depending on the loan balance, very little may have actually gone to the loan (if any).
Angela says
I’ve completed my rehabilitation program in April. Today, I just made my first payment with the new payment plan. I called TOP and the automated line stated that there were not any offsets against my SS#. How much longer should I wait to file my taxes? I rather be safe than sorry. I would like to get my tax refund this year 🙂
Robert Farrington says
Once you make your payments on your new plan, you should be fine and shouldn’t have any more offsets due to your student loans.
Melody says
I have a student loan offset that has been seized for the past two years. I plan to return to school. Will my tax refunds continue to be seized while I’m a student?
Robert Farrington says
Yes, your tax refunds will continue to be offset as long as you’re in default. Furthermore, you can’t get any more Federal loans, and you likely won’t be able to qualify for any private student loans due to your credit.
Liliana Gonzalez says
I have completed 9 months of rehabilitation program, I am now being switched to another repayment program. When will I be okay to file my taxes with out fear of getting refund check garnished by Department of education?
Robert Farrington says
You’re typically fine after you make your first payment on your new repayment plan.
Liliana Gonzalez says
Thank you, I will keep you updated on how it goes 🙂
Jlee says
I will finish my rehabilitation agreement in October and I filed an extension … and I think the deadline to file with turbo tax is October … will I still be able to file my taxes in Nov or Dec? I just want to make sure the offset is taken off my taxes… and I read were you said to wait till you make your first payment on the new repayment plan?
Robert Farrington says
You can file a tax return for a refund anytime within 3 years. So, wait until you are 100% on your new payment plan and then file.
Brii says
Hello, my taxes were taken last year 2017 for $5,000 because my student loans were on default. This year, I gor an extension to file my taxes and as you know we have until mid-October. As of July 21, 2018 my loans are out if default and back in good standing and today I made my 1st monthly payment after the rehabilitation program. I called to check if there were any offsets still and the offset for 2017 ia still showing for $5,000. Am I still at risk for my refund being taken away this year?
Robert Farrington says
Give it a couple weeks. You should be fine.
Dana says
I saw on several post that it will be ok to file your taxes after you are making payments on the new payment plan. I’m unsure of what this is. I supposedly made my last payment July 16, 2018 to Performant (a collection agency for USDE), as well I’m on the income based program with Nelnet. I’m very confused. I completed the 9 month rehab with Performant, USDE says I’m not in default, but the offset 800 number says I still have a debt. I don’t know what to do . Please help
Robert Farrington says
Give it a few weeks and you should be fine. It hasn’t even been a month since you cleared your loan out of collections.
NJE says
Hi Robert, I hope you can help/give me some clarity. I’m concerned following all the research I’ve been doing about tax offsets. So, last year my Federal AND State refunds were offset (about $2,500 in total). At the time, I was not in any rehabilitation program and my wages were also being garnished. Fast forward to now, I finished paying off the loan related to the garnishment and was no longer having any wages taken as of 3 months ago. I also started a rehabilitation plan with the third-party collector and have made 5 consecutive on-time payments. I am also currently unemployed as of one month and a half ago. I am hoping these three things together will be enough to avoid another $2,500 offset this year. I am filing the Treasury Offset Request for Review paperwork this weekend, although I have not received any notice saying they were planning to offset (I didn’t receive any notice last year either, despite being offset). Additionally, I called the number to see if I would be offset. The automated message only mentioned last year’s offset, it did not say anything about an offset connected to my social security number for this year.
Robert Farrington says
It won’t be enough. You need to complete the rehabilitation program and get on an income-driven repayment. Only then will the offset be removed.
Christopher M Leal says
I’m in the rehabilitation program I have one more payment to make which I will do this in a couple of days. My tax advocate just sent out my tax papers today I do believe. So my final payment will be made b4 the DOE receives it. I wanna know if I will be getting anything back. Plus it would help since I’m also a single father of 2 kids.
Robert Farrington says
It’s very close to call. We don’t recommend submitting your tax return until after you make your first payment under your new repayment plan.