A 2015 Guide to the Treasury Offset Program
Posted By Carrie Wiley on March 16, 2015 at 9:35 am
Many students and families help pay for college with federal loans. In fact, in December 2014, total federal student loan debt topped $800 billion. What some people don’t realize, though? Failing to make payments on federal loans can cause big problems – especially when tax season comes around.
Defaulting on federal student loans
Failing to make scheduled payments on your federal student loans, otherwise known as delinquency, puts you at risk of going into default. Defaulting on your loans happens when you have missed payments for more than 270 days, or around 9 months. When your loans are in default, you are legally obligated to pay the entire balance and any collection fees immediately.
Missing just one payment on a loan will technically put the borrower into delinquency. When delinquency occurs, the government must make a good faith attempt to contact you and collect payment before they declare the loan to be in default. If you are not able provide the payment due, the government can not only place your debt in default, but also exercise a loan acceleration clause, making the full loan balance due immediately.
The Treasury Offset Program
What happens if you can’t pay once you are in default? Your student loan will be referred to the Treasury Offset Program for collection, meaning that your tax refund can be seized and used toward your student loan debt. And if you file taxes jointly with a spouse, that refund can still be offset, although a portion may be returned to your spouse if they appeal to the IRS. The offset or seizure of tax refunds may happen each year until the total debt is paid off.
Can you challenge a tax offset?
You can appeal a tax offset, although you have to have a very good reason. Some common reasons for appeal include:
- You have repaid the loan
- The loan is not actually yours
- You have entered into a repayment program with the lender and are making payments as required
- You are in active bankruptcy
- The borrower has died or become permanently disabled
- You are eligible for a discharge because of a closed school or false certification
Preventing a tax offset
If you have student loan debt, there are several things you can do to prevent an offset this tax season.
- Make your minimum student loan payments on time, every month. This is the only way to ensure that your loans don’t become delinquent or go into default.
- Check on the status of your loans well before you file your taxes, and make sure that you don’t have any late fees or missed payments. That way, you’ll avoid any surprises when you get your refund.
- If your loan is in default, consider consolidating the money owed into the Direct Loan program. Those who are eligible for this consolidation can have their loans bundled into one new loan, which will automatically be out of default and in good standing. This option also offers more affordable, income-based payment plans.
- You may also be able to rehabilitate your loans with your current lender. Contact your lender and find out what you can do to get your loan back in good standing. Often, lenders will give borrowers nine months to make late payments and keep up with current payments. Though these payments will be larger, you may be able to avoid tax offsets and wage garnishment.