Help! My Tax Refund Was Taken to Pay My Student Loan Debt

Help! My Tax Refund Was Taken to Pay My Old Student Loan Debt

Every year, many people file their taxes expecting a refund … only to discover the money’s been taken to pay off their student loan debt. The bad news: The government can take that money if your federal student loans are in default. The better news: You can contest the seizure. And, if it was taken in error, you should be able to get your refund back. If it wasn’t an error, well, it can be very, very difficult to get those dollars released. However, we have heard anecdotally from readers who contacted the Education Department, demonstrated hardship and had at least part of their refund returned. The process appears to take awhile — and, again, there’s no guarantee Uncle Sam will comply — but it is an option someone can pursue if money is particularly tight.

Now, let’s delve a little deeper into why refunds get withheld — and what you can do if yours was one of them. (Psst: We’ll also provide some tips of what to do about those delinquent student loans.)

Why Was My Tax Refund Taken?

If you are in default on your federal student loans (which by definition means you are behind by 270 days or more), the Education Department can take your tax refund using the Treasury Offset Program. This program authorizes federal payments such as tax refunds or Social Security income to be intercepted 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.

What Can You Do if Your Refund Was Seized?

We spoke with Jay Fleischman, a student loan and bankruptcy attorney, about what people can do. First, he said that by federal law, people who have student loans in default get a notice that they are at risk of having any potential tax refund seized for student loan repayment. That notice contains instructions for a review of your loan information and how to avoid the offset —so, in other words, if your student loans are in default and tax season is coming up, be sure to watch your mail.

If your refund is taken and you don’t believe it should have been, you can contest the offset by contacting the Education Department. If it was taken in error, the money will be refunded. However, be aware that an error does not generally include not getting a notice; it typically would require that you be able to prove your student loan was not in default.

As we mentioned earlier, if you were in default, you probably can’t get your refund back. 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.

How Can I Keep a Tax Refund From Being Taken for Student Loan Debt?

Fleischman said it’s a good idea to adjust your withholdings whether you’re subject to a tax refund offset of not. A large tax refund means you overpaid your taxes during the year, he notes. 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 over-withholding from last year. Still, revisiting how much you’re having withheld for taxes is a smart move for anyone who got a large refund.

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 stay that way. (Here’s an explainer on how to deal with student loan default.) In some cases, you may be able to get an income-based repayment plan in which your monthly payment can be set as low as $0. And “if your circumstances are dire and expected to remain so,” bankruptcy and the discharge of student loans might be options, Fleischman said. (Yes, that can be done.)

For most, what is done is done. The best thing you can do is to look ahead. And if you haven’t filed your tax return and expect a large refund, you may want to see what options you have to get out of default first. Being in default on a student loan can not only squeeze your budget, it can hurt your credit and cost you thousands of dollars in higher debt costs over a lifetime. You can get two of your credit scores for free on Credit.com to track your standing.

Got a question about your student loans? We want to help. Ask away in the comments section below and one of our experts will try to get back to you. In the meantime, visit our student loan learning center for more info.  

This article has been updated. It originally ran on March 9, 2015.

Image: iStock

 

The post Help! My Tax Refund Was Taken to Pay My Student Loan Debt appeared first on Credit.com.

Why All Government Student Loans Are Not Created Equal

government-student-loans

The timing of an article in The New York Times couldn’t have been more ironic.

There we were, the day before we celebrate America’s Declaration of Independence, and the Times published an exposé on the hardball tactics that the State of New Jersey allegedly takes against student-loan borrowers who are unable to continue making their payments.

It seems that for those who fund their college education with state-sponsored money — which all 50 states and the District of Columbia offer — the word independence is actually two words: in and dependence.

How Student Loan Management Can Differ

I say that because, generally speaking, the principal difference between the loan programs run by the individual states and those run by the federal government is the government’s willingness to work with financially distressed borrowers so they can remain independent.

Something else that distinguishes federally backed higher education loans from those originated by all others — including the states and private-sector lenders — is the outsize influence the government wields on distressed-loan restructuring without regard for the ultimate disposition of the underlying contract.

In other words, even if a government-guaranteed student loan is sold to another entity — public or private, as has been the case with the discontinued Federal Family Education Loan (FFEL) program — the feds reserve the right to mandate a change in the contract’s repayment schedule, even though such a move would likely to have a deleterious aftermarket effect on noteholder rates of return (for example, when the repayment term is extended or a portion of the principal is forgiven).

This helps to explain why there has been so much foot-dragging on the part of loan administration companies that are subcontracted by noteholders to service FFEL contracts that have subsequently been securitized.

And then there is the matter of what constitutes a government loan.

Some time ago, a recent state-university graduate contacted me for advice on restructuring his education-related debts. He was the first in his family to go to college and, given his and his mom’s limited financial means, he funded his education by taking on a fair amount of debt — nearly three times his current annual salary.

We talked about the Department of Education’s various income-based repayment plans, and, armed with that knowledge, he contacted his loan administrator. Several days later, he wrote again to say that his debts were not eligible for relief. “How can that be?” I asked. “You told me these were government loans and the monthly payments consume roughly half your take-home pay. Clearly, you should qualify for IBR.”

As it turned out, the “government” loans he believed he’d taken out were from his state (he insists that his university’s financial aid office referred to these loans as “governmental”). A bit more digging on my part also revealed that program was, in effect, a public-private venture. Similar to the manner in which the now-discontinued FFEL program was structured, his state guaranteed against default loans that were originated, funded and later securitized by private-sector lenders. But unlike the federal government, his state seemed unwilling or unable at that point to mandate distressed-debt restructures after the fact.

Consequently, my young friend ended up like too many of his peers: living in his mother’s basement.

There are those who would say, “Yet another reason for the government to get the hell out of the education-lending business!” Certainly, the manner in which public-backed student loans are administered leaves much to be desired.

But that shortfall, as significant as it is, doesn’t outweigh the two key benefits of the Federal Direct loan program and its predecessor: lower interest rates and a panoply of relief options for when a borrower’s financial circumstances cause him to become unable to meet his payment obligations.

In fact, I would take this a step further by advocating for the federal program to accept for restructuring all types of higher-education loans, without regard for origination channel (state, private and peer-to-peer alike) or repayment status.

Think about it. Even if the base rate that the Federal Direct loan program currently charges is increased to compensate taxpayers for the added risk of guaranteeing these nongovernment loans against default, it would still yield a better social and economic outcome for the country, not least because most financially distressed borrowers are sincere in their desire to repay their debts.

The concept of independence is, after all, meaningless if the means for attaining it are nonexistent.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More on Student Loans:

Image: PamelaJoeMcFarlane

The post Why All Government Student Loans Are Not Created Equal appeared first on Credit.com.