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.

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The Government Can Take Your Social Security to Pay Student Loans, But Maybe Not for Long

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Failing to repay your federal student loans can have serious consequences, from a damaged credit rating and debt collection to lost tax refunds and wage garnishment. The government can also garnish your Social Security benefits, though legislators introduced a Senate bill aimed at ending this penalty on Thursday.

Unveiled by a group of Democratic senators, the Protection of Social Security Benefits Restoration Act would repeal a 1996 law that allows the Uncle Sam to garnish earned benefits in order to clear out federal debts. That’s a good thing, because in 2002 and 2013, Social Security garnishment increased by 400% — from about 31,000 to 155,000 people — according to a report from the Government Accountability Office cited in the bill’s summary. And in that time, the number of people aged 65 and older whose Social Security was garnished increased from nearly 6,000 to 36,000 — a 500% increase.

One would have to forgo student loan payments for a long time to get to this point, as federal student loan default occurs after 270 days, or nine months. However, that doesn’t mean wages are garnished indefinitely. You can get out of default by going through the federal student loan default rehabilitation program or consolidating student loans.

Whether you’ve missed one or nine payments, stop running from your student loan debt. Contact your loan servicer to ask about options and make a plan to get out of debt. Student loan debts are rarely discharged in bankruptcy, so you’ll have to deal with them sooner or later, lest you want to face a future of lost earnings.

Even if the Democrats’ bill becomes law and makes social security benefits untouchable, student loan default can wreck your financial health, especially your credit scores. You can see how student loans are impacting your credit with your free credit report summary on Credit.com.

More on Student Loans:

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