It’s tax time and you know what that means – Tax Returns!
While many people are planning how to spend their tax returns, for some unlucky student loan borrowers, their returns may never come….
Student loan borrowers who are in default and have overdue student loan payments may have their tax return garnished in order to recoup that debt. That’s right — the government will come find you, garnish up to 15% of your wages, or even have your tax return garnished for the remaining outstanding student loan amount. Even then, it normally just covers the fines and fee’s put in place by the collection company!
How To Know If Your Taxes Are On The Chopping Block
Generally, if you have defaulted student loans that have been assigned to a collections agency, your taxes will likely be withheld by the IRS to pay off a portion of your debt. The law states the that the IRS must provide you with a proposed offset, and the opportunity for you to review your loan records. This notice would be sent to you via mail, at the best address that the IRS is able to find for you. If you never receive this letter, it is not grounds for challenging the tax offset, although you can challenge the offset for other reasons as you will see below.
The IRS provides a toll-free number which you can call, go through the automated prompts, and see if you have any offsets pending on your social. Their number is (800)304-3107.
Clearly, you can’t run away from your student loan payments. But there are ways you can avoid a situation like this, keep your tax return to yourself, even if you’re struggling to make the student loan payments.
Step 1: Pay your student loans on time
If you want to avoid having your tax return garnished for missed student loan payments, the key is to pay your student loans on time each and every month. It seems like obvious and simple advice, but keeping up with your payments will help you avoid the government’s wrath and won’t make you subject to tax return Garnished.
Step 2: Ask for Help if you’re having issues making payments.
Tough times can happen to anyone; it can be hard to manage all of your financial responsibilities and your student loan payments when they do, especially if there’s nothing left over at the end of the month to put toward your payments.If at any time you’re struggling to repay your student loans, contact your loan servicer to discuss your options. If they are unable to or refuse to help you, don’t get discouraged. You have options available to you still, just contact an independent company to help guide you.
If you have federal student loans, you may be eligible for an income-driven repayment plan that will lower your payments, even to zero dollars if you meet certain guidelines. In addition but personally not recommended, you may want to consider deferment or forbearance so you can postpone your student loan payments until you’re back on your feet.
However, keep in mind you’ll probably end up paying more interest in the long run with the deferment option — which may be worth it, in order to save you from a garnished tax return and keep your loans in good standing.
“For anyone overdue on payments, the reality is … life has probably happened,” said Adam Carroll, Chief Education Officer at National Financial Educators and the creator of the student loan debt documentary Broke, Busted & Disgusted.
The good news is that student loan borrowers in default can get a 2nd chance based on new options out there. “We understand that these things happen, but they won’t know unless you make the call and figure out a solution,” he explained.
Step 3: Don’t wait, consolidate!
If you’re a few days late on your student loan payment, they are technically overdue. But that doesn’t mean they’re in default yet.
The U.S. government only comes after student loan borrowers who are in default, which means they haven’t made any payments for a period of 270 days. While you may pay a late fee if you miss a payment, your loans only enter default after nine months of not making payments.
If you find yourself in that situation, one way to get out of student loan default is through a Direct Consolidation Loan. Consolidation involves paying off all of your existing student loans with a new, single loan. This also results in just one monthly payment to worry about, with one interest rate.
In order to be eligible for this option, you must make payments under an income-driven plan or make three consecutive payments on the loan before you apply for consolidation.
Working to get out of default ASAP can help you avoid your tax return garnished and put you back in good standing with your loans.
Step 4: Rehabilitate your loan
If your loans are in default and you want to avoid having your student loan tax return Garnished, consider rehabilitating your loans to get them in good standing. The process of rehabilitation is a bit more complicated than consolidation and takes a lot longer to help but it is another option get out of default.
Through loan rehabilitation, you must make nine consecutive payments on time over 9 months. Under this option, you will be set up with a reasonable payment plan, with monthly payments that are equal to 15 percent of your discretionary income.
Step 5: Contact the IRS
If your student loan payments are overdue, unfortunately, the government is well within its rights to come after and have your tax return garnished. Through the Treasury Offset Program (TOP), the government can seize your return in order to repay your defaulted student loans.
But having your tax return garnished should come as no surprise. You will receive a notice letting you know that a tax offset will occur before any action is taken.
If you didn’t get a notice or have any questions or concerns regarding the tax offset, you can contact the IRS at 800-304-3107.
According to legal site NOLO, student loan borrowers have 65 days from the time of the notice to request a review and object to the tax offset. You may want to object if there’s been a misunderstanding surrounding your student loan payments or if your loan is in the process of being forgiven or discharged.
The best way to avoid student loan tax return garnishment is to keep making payments. If you’re struggling to keep up, get in touch with a “Guidance Counselor” to discuss your options.
If you’re already dealing with a tax offset, contact the IRS as well as your loan servicer to figure out your next steps. Just don’t ignore the problem and hope you get your tax return…. Get the help you need to make sure you and your family get those tax returns back!