How to qualify for the student loan tax offset hardship refund

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The average federal student loan balance is over $37,500, and about 6.7 percent of federal student loans are in default. For many federal student loans, this means not making a payment for 270 days. For Perkins Loans, however, default starts the same day you miss a due date.

If your loan is in default, you may be subject to a student loan tax offset, which allows the U.S. Department of Education and U.S. Department of the Treasury to withhold your federal income tax refund to repay your defaulted federal student loans. However, this does not apply to everyone in default. If you qualify, a student loan tax offset hardship refund allows you to recover the money withheld from your tax return.

What to do if you’re in a student loan tax offset

If you are at risk of a student loan tax offset, you will receive a notice in the mail sent to your last known address. If you don’t think that you should be receiving the notice, the first thing you’ll need to do is check the validity of the tax offset. You have 65 days between your offset notice and the start of the offset, so it is important to report inaccurate information as quickly as possible.

Examples of when you may be able to refute the offset include:

• Identity theft: If the loan cited in the offset letter is not yours, it could be a case of identity theft.
• Bankruptcy: If you’ve filed for bankruptcy, you may be able to suspend the offset.
• You’ve already paid the debt: If you have enrolled in a repayment plan agreement and are paying down your debt, or the balance on the notice isn’t correct, report it.

However, if the offset is correct and you are in default, you still have options. You can apply for the offset hardship refund, in which the money withheld from your tax refund will be returned. You can also contact your loan servicer to try and set up a repayment agreement. In the meantime, start making payments on your loans.

How to qualify for a student loan offset hardship refund

To qualify for a student loan tax offset hardship refund, you’ll need to provide proof of serious financial hardship. Qualifying circumstances might include:

• You’re currently homeless.
• You’re permanently disabled.
• You’ve filed for bankruptcy and the loan was discharged.
• You’ve finished your unemployment benefits.

If you think you qualify, determine which agency withheld your tax return. You can contact the Treasury Offset Program (TOP) at 800-304-3107 for more information. Once you know which agency withheld your tax return, request the student loan tax offset hardship refund form. You can also contact the Department of Education’s Default Resolution Group at 800-621-3115 if you defaulted on a federal education loan.

Always check with your agency to see what the tax offset hardship refund requirements are and what documents you’ll need to provide.

How to request a student loan tax offset hardship refund

If you believe you may be due a hardship refund, there’s a series of steps required to apply for the refund. They include:

1. Confirm your student loan tax offset status: You can’t apply for a student loan tax offset hardship refund until you’ve confirmed that you’ve been impacted by this action. To confirm whether an offset is going to occur or is taking place, contact the TOP call center.
2. Collect evidence of hardship: If you intend to apply for a hardship refund, you’ll need to have evidence available establishing why you qualify. Your evidence might include proof of a disability, an eviction notice from a landlord, foreclosure notice for a mortgage, significant medical bills or the end of unemployment payments.
3. Submit tax offset refund request: Complete and submit an application for a tax offset refund to your loan servicer. You will likely be required to provide the supporting documentation you’ve gathered regarding your hardship.
4. Wait for a reply: After submitting your application and supporting documents, it can take up to 30 days to receive a decision from your loan servicer.

How to avoid a tax offset

The best way to avoid a tax offset is to make your required student loan payments on time. However, there are some other options to consider that could make your student loan repayment easier:

• Refinancing: Refinancing can be a useful way to consolidate multiple student loans into one loan to gain a lower interest rate and better terms. Your credit score will impact your interest and approval rates, so check the lender requirements before applying.
• Deferment: Student loan deferment allows you to temporarily stall your payments. Interest does not accrue on subsidized loans. Federal student loans have specific deferment programs.
• Forbearance: Forbearance will let you stall your payments, although interest will accrue during the forbearance period. If you do not get approved for a deferment, a forbearance may be worth considering.
• Income-driven repayment plan: If you do not qualify for a deferment or a forbearance, a federal income-driven repayment plan may be your next-best option. There are four options to choose from, and you can get the application from your loan servicer after discussing which plan is best for you.

The bottom line

If you have difficulty repaying your student loans, you may be faced with a tax offset. However, it’s possible to reclaim the funds taken from your tax return if you’re experiencing extreme financial hardship.

For assistance with your student loan offset hardship refund request, contact a student loan attorney or financial planner to help you get on track financially. Remember even if current interest rates are better than what your federal loans are, refinancing will cause you to lose all protections.

Frequently asked questions

• How has the coronavirus affected tax offsets?

  At the beginning of the pandemic, the government paused collections activities on federally held student loans and FFEL loans in default. This student loan payment protection was extended several times but has since expired, and payments restarted in October 2023. This relief means that your 2020, 2021 and 2022 tax refunds could not be offset if you defaulted on federal student loans. This relief was put into place on March 13, 2020. If you had your tax refund withheld on or after that date, you may be eligible for a refund.

• How do I know if my student loan has been submitted to the offset program?

  If your student loan is subject to the tax offset program, you should have received a letter from the Bureau of Fiscal Service. Call the number on the letter to check on your loan status. You can also call the Treasury Offset Program (TOP) at 800-304-3107 or the Department of Education’s Default Resolution Group at 800-621-3115.

• Can you stop a tax offset?

  It may be possible to stop a tax offset. You’ll have to prove a serious financial hardship and apply with the right federal agency to have your refund returned to you. There are a limited number of financial hardships the government will accept. You could also try to refinance your loan, switch to an income-driven repayment plan or have the loan placed in deferment or forbearance status.