The amount of money owed by student loan borrowers is staggering. More than 43 million people owe more than $1.6 trillion in student loan debt. The average federal student loan balance is over $37,000.

Paying those loans back has become increasingly difficult. Nine percent of borrowers who attended public universities, seven percent who attended private, nonprofit schools and 24 percent who attended private, for-profit schools were behind on their payments.

At any given time, there’s an average of 7.1 percent of student loans in default, which means these borrowers have not made their monthly payments. For many federal student loans, you’re in default if you haven’t made a payment for 270 days. For Perkins Loans, you default when you don’t make a payment by the 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. If you have defaulted on a federal education loan, you can contact the Department of Education’s Default Resolution Group at 800-621-3115.

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 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. If you need assistance with your student loan offset hardship refund request, contact a student loan attorney or financial planner to help you get on track financially.

Frequently asked questions

  • 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 has been extended several times but is set to expire on June 30. This relief means that your 2020, 2021 and 2022 tax refunds cannot be offset if you have 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.
  • 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.
  • 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.