How To Qualify for the Student Loan Tax Offset Hardship Refund

Student loan offset can be refunded for eligible borrowers

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If you owe money to the federal government, the IRS may withhold some or all of your tax refund to satisfy the debt. When that happens, it is called a tax refund offset.

A student loan offset occurs when you have delinquent student debt owed to the Department of Education. It's possible, however, to recover tax refund offsets if you qualify for a hardship exception. Below, we’ll take a closer look at how the student loan tax offset hardship refund works.

Key Takeaways

  • The federal government can withhold some or all of your tax refund to offset outstanding debts owed, including federal student loans.
  • If your tax refund is offset for student loan debt, you may get some of that money back by requesting a hardship exception. 
  • You'll need to provide proof of a financial hardship to qualify for a student loan offset refund.
  • If you're married and file a joint return, you may be eligible for injured spouse relief if your spouse is the one who owes past-due federal student loans.

What Is a Student Loan Tax Offset?

A student loan tax offset allows the federal government to collect outstanding debts if you default on federal education loans. This could happen when you miss a loan payment and your loan becomes delinquent. You're then considered to be in default if and when you don't make payments toward your loans for at least 270 consecutive days. This rule applies to Direct Loans and Federal Family Education Loans (FFEL). When it comes to the federal Perkins Loan, you may be in default following the very first time you don't make your payment by the due date.

The Department of Education has temporarily suspended tax refund offsets for student loans that entered default on or after March 13, 2020. In addition, student loan payments are on pause until Jan. 31, 2021.

The Department of Education can seek to recover some or all of what's owed through a student loan tax offset. These requests are handled by the Treasury Department's Bureau of the Fiscal Service (BFS). If a student loan tax offset is being pursued, the BFS will send you a written notice to inform you that your refund is being withheld for unpaid student loan debt. This notice is sent 65 days before the offset is scheduled to begin, giving you time to refute it, or get your finances in order to repay the debt in full.

Who Qualifies for Financial Hardship?

If you know that you owe the student loans in question, you may be able to avoid the offset if you have a demonstrable financial hardship. There are a few situations that may qualify for a hardship exception if your tax refund is offset or delayed.

Defaulting on federal student loans can make you ineligible for new Department of Education loans or income-driven repayment plans. If you think you are unable to repay all of your loans in full, talk with your loan servicer about the options available.

Proof of Exhausted Unemployment Benefits

If you were receiving unemployment and have exhausted those benefits, you may be able to prove a financial hardship. When submitting a tax hardship refund request, you need to show documentation that you've exhausted your benefits.

Proof of Eviction or Foreclosure

Being evicted or losing your home to foreclosure may make you eligible for a hardship exception. Again, you'll need to provide proof that you've been served with an eviction notice or foreclosure notice.

For this exception to count, you must prove the foreclosure is from the court system and the eviction is from the rental agency (respectively), that the event occured within three months of the offset date, and you must list the total amount in arrears.

Utility Disconnect/Shutoff

If you've received a notice from your utility service provider that your service is to be shut off or disconnected for nonpayment, that could be used as proof of hardship. The date on the notice needs to be within three months of the offset date.

Homelessness

Being homeless is a qualifier for a tax refund offset reversal. You'll need to certify you are homeless and have no permanent address.

Total and Permanent Disability

If you've become permanently disabled and can't work, you may be able to claim a hardship exception. You also may be able to seek a discharge of any remaining student loans if a disability prevents you from further earning income to make the payments.

Injured Spouse

Although not necessarily hardship related, you may qualify for a reversal of a student loan tax refund offset as an “injured” spouse. In this case, the term refers to the negatively impacted spouse who does not owe the debt at hand.

You'll need to file Form 8379, Injured Spouse Allocation, with the IRS. The IRS may return your portion of a refund due on a joint return if you can prove you're not responsible for your spouse's education debt.

Loan Repayment/Rehabilitation

You may be able to halt a student loan tax offset within the 65-day window by restarting your repayment plan. Once the 65-day window ends, you can potentially reverse a tax offset by entering federal loan rehabilitation. To qualify, you’ll need to make the first five of nine required payments to qualify.

Private student lenders can't request a tax refund offset for unpaid debts, but they can seek wage garnishment or bank account levies.

How To Prevent Student Loan Tax Offsets

If you believe you qualify for a financial hardship exception or you think your refund was withheld in error, there are some things you can do to attempt to get it back. First, contact the BFS at 800-304-3107 (or TTY/TDD 866-297-0517) to get more information and find out where the Treasury Department applied your refund.

Contact the agency that received your tax refund. In the case of student loans, this would be the Department of Education. The Department of Education should be able to tell you which outstanding student loans the refund was applied to. From there, you can contact your loan servicer directly to find out what you need to do next to challenge an offset.

Typically, this involves filling out a form provided by your loan servicer and submitting it to the Treasury Department. You'll need to specify the financial hardship reason for requesting an exception and attach copies of any required supporting documentation (i.e. eviction notices, utility disconnect statements, etc.)

At this point, the Treasury Department would review your application and documentation to decide if you qualify for a financial hardship. Keep in mind that if you're granted a financial hardship exception and your refund offset is returned, this may be a one-time thing. You may not be eligible for future hardship exemptions if your loans are still in default.

Consolidating federal student loans can help with streamlining monthly payments so they're easier to manage, which can help you avoid negative credit score damage from late payments.

The Bottom Line

A student loan tax offset may temporarily derail your financial plans, but it is possible to get your money back if you have an eligible financial hardship. If you're struggling to keep up with student loan payments, talking to your lenders could help you to avoid default. Your lender may be able to help with restructuring payments or placing loans in deferment or forbearance until your financial situation stabilizes.

Frequently Asked Questions (FAQs)

How do I know if my student loan has been submitted to the offset program?

If your tax refund is set to be withheld for unpaid student loans, you'll receive a written notice from the Bureau of the Fiscal Service telling you so. This notice is sent 65 days before the offset is scheduled to begin. If you didn’t get a notice about an offset but realize your tax refund is smaller than you expected, call the IRS at 800-829-1040 (or TTY/TDD 800-829-4059).

What is the IRS number for the student loan offset program?

You can call the IRS at 800-829-1040 (or TTY/TDD 800-829-4059) for more information or assistance in resolving student loan offsets. You can also contact the Bureau of the Fiscal Service (BFS) at 800-304-3107 (or TTY/TDD 866-297-0517) to find out where the Treasury applied your tax refund.

How do you report interest paid through student tax offset on your returns?

Interest paid on student loans is reported on Form 1098-E. You can file this form when you file your annual income tax return.

What is the minimum student loan debt that will trigger a tax offset?

The Department of Education does not specify a minimum student loan debt that will trigger a tax offset. Because of this, it's important to stay on top of student loan payments as defaults of any amount could lead to a refund offset.