Every year, citizens across the United States await what they hope to be a fruitful tax refund, and for many, the wait is rewarding. With the average tax return hovering around $2,700, many look forward to making a big purchase, paying down debt, or even planning their next vacation. Unfortunately, for some, a year’s worth of hard work and taxes paid doesn’t offer them the opportunity to plan how to spend their return.

That’s particularly true of federal student loan borrowers who, for one reason or another, default on their student loans and are then required by the Treasury Department to repay that school debt through a garnishment or “tax refund offset.”

When Can Your Tax Refund Get Garnished?

The first stop on the path to a tax refund garnishment is consistent delinquency that leads to default, or what is commonly defined as being 270 days or more past due on your loan payments. Once your loan account is in default, and you’ve neglected to make a payment plan or attempt to pay, the Department of Education can request the Treasury Department seize your tax refund to repay the debt. This program is known as the Treasury Offset Program.

What to Expect If Your Tax Refund Gets Allotted for Repayment

Once your account has been flagged as eligible for the Treasury Offset Program, they must notify you 65-days prior to the offset. This notice must explain your rights as a debtor (including the right to request a review of the account), the opportunity to dispute or appeal the debt, the amount of the offset, and any opportunities for repayment.

Additionally, if you have not received a letter but believe your current loan standings may put you at risk for a tax offset, you can inquire by contacting the Treasury Offset Program’s call center at 1-800-304-3017 or call the IRS at 1-800-829-1040.

If you’ve found out your tax refund will be garnished, the next question is likely “how much?” There are regulations that govern how much of your paycheck can be garnished because of defaulted student loans (up to 15 percent). However, the government can seize 100 percent of your tax refund until the default is resolved via a rehabilitation program, a student loan consolidation, or full repayment of the loan.

Qualifying for Tax Offset Hardship

Just because you’re on the path to tax refund garnishment doesn’t mean you are destined for a life void of tax refunds. In some cases, you may be able to recoup or avoid garnishment by qualifying for a Tax Offset Hardship.

How to Pay for Trade School

You may be eligible for a Tax Offset Hardship if any of the following apply:

  • The loan is repaid
  • You are participating in a loan repayment agreement with the Department of Education and are making the required payments
  • You have not had a previous hardship refund
  • You are experiencing any of following: exhausted unemployment benefits, eviction, foreclosure, utility disconnections, homelessness

To find out more about the Tax Offset Hardship options, contact the Treasury Offset Program at the number above.

How to Stop Student Loan Tax Garnishment

If you are in default, or dangerously close to default, and you want to avoid a tax offset, you do have options. Here are a few:

  • Federal consolidation: Many borrowers are eligible for a Direct Consolidation Loan. This will allow you to consolidate multiple loans into one, resulting in one monthly payment and access to loan repayment programs including Income-based Repayment (IBR) and Pay As You Earn Repayment (PAYE). If your loans are already in default but you want to take advantage of a Direct Consolidation Loan, you must agree to one of the federal repayment plans and/or make payment arrangements and make those payments for three consecutive months.
  • Student loan rehabilitation: Loan rehabilitation offers borrowers a single opportunity to get out of default. To do this, you must make nine “voluntary, reasonable, and affordable monthly payments” over 10 consecutive months.
  • Deferment or forbearance: If you’re facing temporary hardships, deferment and forbearance both temporarily (up to 12 months) postpone or decrease your monthly loan payments. However, a deferment will remove the need to pay interest that accrues, while a forbearance will not.
  • Make the minimum payments: Though student loans can be expensive, the best way to avoid a tax offset is to make the minimum payment required each month. Call a federal student loan representative to determine if you can lower your minimum monthly payment.

Though there are plenty of benefits to having student loans through the government, when you fall behind and default on your loans, your wages and your tax return could be in jeopardy. If you find yourself in a position where this is the case, try to work with the government to establish a new payment plan or rehabilitate your loans to avoid the garnishment altogether.