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If you don’t pay off a federal student loan, your tax refunds can be used to cover what you owe. However, the government has suspended this program and other collection activities until September 30, 2021, due to the pandemic.
After this relief is complete, the best way to prevent student loans from receiving your repayment is to correct the default before you file your tax return. Once your money is gone, it is much harder to get it back.
Are tax refunds not being made due to the coronavirus?
The original coronavirus relief bill prevented tax refunds for delinquent student loans if you filed your return after March 13, 2020. Refunds in process from that date were also protected. .
If you filed your 2019 tax returns before March 13, 2020, contact your loan holder to see if they will return some or all of the money to you. Loan holders have different standards for reversing garnishment, but you will likely have to start making payments again to get them to act.
Collection activities are currently on hold until September 30, 2021 for all federal student loans and commercially-held FFEL debt, which could also protect your 2020 repayments. The Education Department said borrowers whose loans overdue will have the opportunity to enter a payment plan – which would prevent garnishment of the tax refund – before collection activities resume.
Relief checks issued due to the coronavirus pandemic are also not taken for overdue federal loans. But your check could be in jeopardy if a judge allowed a lender to foreclose on your bank account because of an overdue private student loan.
Will your tax refund be entered?
You must have the federal student loans in default to enter your tax refund. Federal student loans go into default after 270 days of past due payments. Private student loans in default are not eligible for garnishment for tax refunds.
If your tax refund is garnished, you will receive a letter from your loan holder stating that they have referred your account to the Treasury Compensation Program, or TOP. This is the part of the US Department of the Treasury responsible for taking federal payments to cover overdue debts owed to government agencies, such as overdue child support and overdue student loans.
Your loan holder will send you a tax offset notice before your repayments are entered. This usually happens months before you file your return, so you have time to take action. But you may only receive this notice once.
For example, let’s say you had a default in January 2019. In November, you would probably have heard that your 2019 repayments would be cleared. This may not have happened because of the coronavirus relief measures. The same could happen in 2020. Nonetheless, if you do not process the past due loan, your 2021 repayments could be foreclosed without further notice.
You cannot dispute the garnishment on the grounds that you did not receive the set-off notice. Check that your loan holder has up-to-date contact information for you. If you don’t know who holds your loans, log into your account at Studentaid.gov. The Treasury will contact you after clearing.
How to stop student loan tax garnishment
Here are the best ways to stop student loan tax garnishment, along with the documents you’ll need to support them:
You have paid off some or all of the debt. If you have already paid off the debt in full, you should receive your full repayment. If the amount shown on your set-off notice is incorrect, you may receive a refund based on the amount you still owe. Provide copies of checks or money orders used for payment, as well as receipts for payments made.
You don’t owe the debt. Your student loan has been or will be canceled for reasons such as bankruptcy, total and permanent disability or academic fraud. You will need to provide copies of completed loan release applications or court documents and release orders. If you’ve never taken out a student loan, don’t ignore an offset letter – you may be a victim of identity theft.
You have already agreed to make payments. You have a formal agreement with your loan holder and have made payments within 65 days of receiving your clearing notice. If you complete this agreement – provide a copy, along with any checks, money orders, or receipts that document the payments – your refund must be returned.
You are experiencing financial difficulties. Student loan holders have different standards for hardship relief. Some may refund all or part of your tax refund if you can prove that you have exhausted unemployment benefits or that your house has been foreclosed on, for example. To qualify, most will want you to begin the rehabilitation process or voluntarily enter into a repayment plan.
Once a compensation notice is sent, you have 65 days to dispute it. If you believe the garnishment is based on inaccurate information, you have 20 days to request your records. After your loan holder submits your records, you have an additional 15 days to request a formal review.
Your compensation notice will list the instructions for setting up a review. If you have any questions about this process, you can also contact TOP directly at 800-304-3107.
What happens if you don’t stop a tax deduction?
Your student loan holder will be able to enter your repayment – and future repayments – until the tax deduction stops.
You can collect federal student loans in good standing through rehabilitation and consolidation, which will also stop other consequences of the default such as wage garnishment. Rehabilitation takes longer, but you don’t have to complete the process to avoid future garnishment. You only have to make the payments according to your agreement.
If you’ve missed your review window or your repayment has already been entered, you should always contact your loan holder to see under what circumstances you can get some or all of your money back. The loan holders have their own policies for these situations.
Will my spouse’s reimbursement also be entered?
If you are married and file taxes jointly, you may be able to protect your spouse’s share of the federal tax refund by submitting an Injured Spouse Allocation Form (IRS Form 8379).
You can provide this form when you file your taxes or afterwards if you were not aware of the compensation at the time. You can have up to three years from the due date of your original return to submit these documents.
You can also prevent student loan tax garnishment for your joint state return. These rules depend on where you live. Check with your state’s tax department for more information.