What You Need To Know About Your Tax Refund And Student Loans


Student loans and tax returns go together.

The federal government originates all federal student loans. It also processes your tax return each year, handing out refund checks in cases of overpayment.

When you don’t pay your student loans and they go into default, your refund may be at risk.

Here’s what you need to know, and how to handle the situation.

Tax Refund Offset Program

Federal regulations allow the U.S. Department of Education to grant claims to the Department of the Treasury for collection of default student loans by offset against federal and/or state income tax refunds and any other payments authorized by law.

The Department can request the Treasury Department to offset and collect any defaulted federal student loan debt.

It’s important for you to understand that the offset process applies only to defaulted student loans, not to those that are being paid on time or those that are merely past due.

In order to be declared in default, you must typically be at least 270 days late on your federal student loan payments.

How You Find Out You’re Going To Lose Your Tax Refund

Federal law requires the Department to give you prior notice of the proposed offset. As part of that notice, you have a chance to review your loan records and object to the offset.

You have only 20 days from the date of the notice to request copies of your loan records, and 65 days from the date of the notice to request a review of the loan file.

To do so, you’re going to need to send a letter with your name, social security number, the loan information, a written objection to the debt, whether you are requesting a hearing in person or by telephone, and provide any documents which support your objection.

Losing Your Refund If You File Taxes Jointly

What if you owe money on defaulted student loans but your spouse doesn’t?

Federal tax refunds payable to joint filing couples are subject to offset, but you can get back the portion of the refund owed to your spouse. The procedure for doing so is by filing an injured spouse claim with the Internal Revenue Service.

If you haven’t already filed your federal income return and know you’re going to have a problem with a tax refund offset, attach IRS Form 8379 to your original return and be sure to write “injured spouse” in the upper left corner of the first page of the tax form. If, however, you’ve already filed your tax return then send the IRS Form 8379 separately.

Can You Get Your Tax Refund Back From The Government?

The only way you may be able to get back your tax refund after it’s been taken is to file for bankruptcy. But you’ve you a small window of time to do so, and it may or may not be worth it.

Under the bankruptcy laws, the trustee can recover money paid to a creditor within 90 days of the date on which the bankruptcy case is filed, so long as the amount paid is more than $600. If you can exempt the amount of the tax refund, however, you’re the one who can get back the money.

If your bankruptcy is filed under Chapter 13, then you can bring the preference lawsuit to get the money back even if you can’t exempt the refund.

Even if you can get back the money, you should talk with your lawyer about whether it makes sense to do so. The cost and time involved in getting back the money may not be worth it.

And if student loans are your only debt, bankruptcy may not provide you with any benefit other than getting back your refund.

Preventing Future Tax Refund Offsets

Once the wheels of a tax refund offset are in motion, it’s tough to stop it from continuing down the tracks unless you take action.

To prevent the loss of next year’s refund you’re going to need to work with the U.S. Department of Education to get onto a payment plan for your loans. For most people, that means rehabilitation of your federal student loan and getting into a plan such as income-based repayment.

Private Student Loans Are Different

The tax refund offset program applies only to federal student loans. If you’re worried about private student loans, your concern shouldn’t include your refunds.

In order for a private student loan company to take anything from you, they’re going to have to sue you in court just like any other creditor. Once the lender gets a judgment against you, your bank account may be frozen and a portion of your wages taken. Though the tax refund can be taken if it’s sitting in the bank account, the lender can’t simply ask the federal government to turn over your tax refund.

Be Proactive To Minimize The Damage

As you can tell, the government is going to take your tax refund only if you don’t do something about the federal student loans.

If you fall behind, get into a repayment plan to catch up.

If you go into default, look into rehabilitation or consolidation (or both).

And if it’s a private student loan, defend the case if you’re sued.

Do nothing, though, and you’re likely to wake up one day with a bad situation on your hands.

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.