If your federal student loans are in default, you might face a tax offset when tax season comes. The IRS could take some or all of your tax refund and use it to pay off your defaulted federal loans.
Below, we’ll fill you in on why tax offsets happen, and how. You’ll learn how to know if you’re facing a tax offset, as well as how to avoid one.
How to Find Out if You’re Facing a Tax Offset
If you never receive a notice from the IRS, they may not have the correct address on file. Unfortunately, you can’t challenge a tax offset on the grounds that you never received the proposal. Make sure the IRS has the correct address on file.
You can also contact the resources below to find out whether you’re facing a tax offset:
- TOP | 1-800-304-3107 – Contact the Treasury Offset Program to determine if your student loan debt has been submitted for a tax refund offset.
- FMS | 1-800-304-3107 – Contact the Financial Management Service to find out whether your refund was reduced because of an offset.
- IRS | 1-877-777-4778 – Contact the Internal Revenue Service if you feel your refund was offset in error. You can also use the IRS’s Tax Advocate Service at www.irs.gov/taxpayer-advocate.
How to Stop a Student Loan Tax Offset Before it Happens
When you receive a proposal for tax offset due to your student loans, you’ll have time to make some adjustments. Those adjustments could help you avoid the tax offset entirely. Below are some of your options if you want to try and avoid a tax offset before it happens.
Option 1: Request a hearing to challenge the offset.
Your first option is to request a hearing or review. This options is only valid if you feel the offset was initiated in error.
When you receive a proposal for tax offset due to student loans, you should check the information included against your own records and loan account statements. Make sure that everything aligns and makes sense. If there are errors, you can challenge the offset and request that the IRS takes another look.
Here are some reasons you could request a review hearing for your refund offset:
- Incorrect loan balance or balances.
- Unenforceable debt.
- You’re eligible for TPD discharge.
- Your loans aren’t in default.
- You don’t owe the debt.
- The debt was discharged.
- You’re already in a debt rehabilitation program.
- You’ve undergone a bankruptcy.
On your proposal for tax offset, you should find information about how to challenge the decision. You’ll typically need to fill out this form: Request for Review, which should have been sent to you along with your debt statement. File this form within 65 days of receiving the offset proposal notice.
You can also call the IRS using the contact resources listed above to make sure you understand how to proceed.
Option 2: Rehabilitate your loans.
You can also avoid a tax offset by agreeing to pay your debt, and creating a strategy for doing so. This is called rehabilitating your student loans.
If you and your loan servicer can agree on a reasonable and affordable payment plan, you can start making payments to get your loans back into good standing. A typical loan rehab with a loan servicer takes nine months. Any late payments will restart the recovery period.
After the rehabilitation is complete, you’ll likely go back to making larger payments on your student loans. However, you’ll no longer be in default or at risk of tax offset and wage garnishment. You can also alter your monthly payments by adjusting your income-driven repayment (IDR) plan.
If you’re not already enrolled in an income-driven repayment (IDR) plan, you should do so as soon as possible. You can qualify for more manageable monthly loan payments that will help you avoid tax offset in the future.
Additionally, you could have your loans forgiven after 25 years of on-time payments. You can complete an IDR plan request or adjust your current IDR plan at StudentAid.gov.
Option 3: Consider loan consolidation to get back in good standing
Most federal loans have the beneficial, built-in option of Direct Loan Consolidation. If you haven’t already consolidated your federal student loans, doing so could help you avoid a tax offset.
By consolidating your loan into the Direct Loan program, your loan is taken out of default and you are back in good standing. This prevents a tax offset as you no longer have a defaulted loan, but the consolidation must happen well in advance of a pending tax offset.
Consolidation also allows you to make more manageable monthly payments with an adjusted IDR plan. Apply for Direct Consolidation Loan at StudentAid.gov.
Let Me See What My Income-Driven Payment Could Be
Option 4: Pay your loans off in full.
If you’re financially able to pay off your student loans in full, this is usually your best option. You can avoid the hassle of a tax offset and the added cost over time of debt rehabilitation or consolidation.
However, most people who are facing a tax offset for defaulted student loans aren’t able to pay off their loans in full.
It’s generally not in your best interest to take out a private loan to cover your federal loan costs and pay off your loans in full, just to avoid an offset; your private loan will likely come with higher interest rates, and it won’t have any federal repayment benefits.
Option 5: Seek professional help.
If you could lose a significant refund, or you’re depending on your tax refund to pay other essential costs, you might benefit from professional assistance.
You can hire a lawyer to help you challenge the tax offset process, but make sure it’s one who understands student loan and federal debt law.
You can also call 1-844-669-4407 to seek assistance from one of our vetted private companies.
Option 6: Wait and see.
Your final option is to do nothing. You can allow your tax refund to be offset in exchange for paying off some of your outstanding debts. If you choose to later on, you can file a claim that could allow you to recoup your tax refund (see below).
When and Why Do Student Loan Tax Offsets Happen?
Student loan tax offsets can occur when your federal student loans are in default, and you’re scheduled to receive a tax refund.
Tax offsets happen in other situations, too, including:
- Past-due child support;
- Unpaid tax obligations; and
- Certain unemployment compensation debts.
Tax Offsets and Garnishments Are Legal
Student loan tax offsets are completely legal, and they’re a common way for the Department of Education to recoup its costs.
The U.S. Department of Treasury and Congress authorize the Bureau of the Fiscal Service to conduct a program called TOP (Treasury Offset Program).
Under TOP, the government can legally take your tax refund and use it to repay federal and state debts.
When You’re in Default
If your federal student loans are in default, it’s very likely you’ll receive a proposal for tax offset. Federal student loans generally go into default after 270 days of no-payment.
As mentioned above, the IRS must provide you with a written tax offset proposal, which allows you some time to respond. It also gives you time to adjust your loans in ways that might help avoid a tax offset, as we’ll discuss below.
When Your Spouse is in Default
Another time that you might face a tax offset is when your spouse has student loans in default. If you file your taxes jointly, your tax refund is payable to your spouse, too. That means that the IRS can use your refund to repay your spouse’s debts, and vice-versa.
Luckily, there’s a straightforward way to challenge this type of offset. If your refund was garnished because of your spouse’s debts, you can file an Injured Spouse Claim with the IRS. We’ll go into challenges more below.
How to Get Your Refund After a Student Loan Tax Offset
Even after a tax offset occurs, you might be able to get your refund. There are two primary ways of doing so: filing a financial hardship claim, and filing an injured spouse claim.
Prove financial hardship.
If you’re facing serious financial hardship, you might qualify for a tax offset refund. Note that just being unable to pay your bills doesn’t qualify as financial hardship.
According to ECMC (a major federal loan-holder), these are some of the reasons you might be able to claim financial hardship:
- Exhausted unemployment benefits.
- Eviction or foreclosure.
- Utility disconnection or shutoff.
- Homelessness.
If any of the above apply to you, you’ll need to provide documentation as proof.
If you know that ECMC is your student loan-holder, you’ll need to download, fill out, and submit their Tax Offset Hardship Request.
If your loan-holder is someone else, you’ll need to contact them to acquire the correct forms. If you’re not sure who your loan-holder is for your federal student loans, use the National Student Loan Data System (NSLDS) to find out.
File an Injured Spouse claim.
If you’re experiencing a tax offset because of your spouse’s debt, you may be considered an “injured spouse.” In this case, you can file an Injured Spouse Claim. Potentially, this could allow you to receive your portion of a joint tax refund.
To be considered an injured spouse, you must:
- Have paid federal income taxes, or claimed a refundable tax credit.
- Have filed a joint return, and you’re not responsible for the debt that created the offset
You’ll need to use form 8379 to file your injured spouse claim. For more guidance on Injured Spouse Claims, visit the IRS webpage.
What Happens After a Student Loan Tax Offset?
After TOP offsets your tax refund to repay your federal student loans, you should receive an additional notice. This final notice will let you know how the tax offset affected your loan balance or balances, and how to proceed going forward.
If you successfully disputed your tax offset, or if your debt was fully paid via the tax offset, it can take the IRS about eight weeks to clear your account.
As mentioned above, you should also take steps to avoid tax offsets happening in the future if you still owe a balance on your federal loans. Some solutions include enrolling in or updating your IDR plan, working with your loan servicer to rehab your debt, and consolidating your debt.
Tax Offset FAQs
Does a student loan tax offset affect my credit?
Having a student loan tax offset doesn’t directly impact your credit; in fact, it can help your credit if it helps you get out of default.
Can the IRS offset my taxes for private student loans?
No. The IRS and the Treasury Department cannot use your tax refund to repay private loan debt. A tax offset can only be used to recoup federal debts.
How do I know if my tax return will be offset?
You’ll know your tax return is going to be offset when you receive a notice (or “proposal”) from the IRS and Treasury Department. If you’ve recently moved, the IRS might have the incorrect address on file. Make sure you update your address with IRS. You can also call the IRS at
How can I challenge a student loan tax offset?
You can challenge a student loan tax offset before it happens by sending a Request for Review to the IRS. Fill out this form and send it to the address included in your tax offset notice.
You can only do this if one of the following applies to you or your debt accounts:
- Incorrect loan balance or balances.
- Unenforceable debt.
- You’re eligible for TPD discharge.
- Your loans aren’t in default.
- You don’t owe the debt.
- The debt was discharged.
- You’re already in a debt rehabilitation program.
- You’ve undergone a bankruptcy.
How can I make sure my taxes aren’t offset if I’m in default?
If you’re in default on your federal student loans, there’s a very good chance your tax refund will be offset. To avoid a tax offset, you can try consolidating your loans with a Direct Consolidation Loan. You can also contact your loan servicer to set up loan rehabilitation, and enroll in an income-driven repayment plan.
What other types of tax offsets are there?
The IRS lists these debts for which your tax refund could be offset:
- Past-due child support;
- Federal agency non-tax debts;
- State income tax obligations; or
- Certain unemployment compensation debts owed to a state (generally, these are debts for (1) compensation paid due to fraud, or (2) contributions owing to a state fund that weren’t paid).
