If you have received a notice in the mail that you are at risk for a federal student loan tax offset — meaning your federal income tax refund could be withheld by the government — you have options. If you qualify, a student loan tax offset hardship refund allows you to get back the money taken from your tax return.

Read on to learn more about how a student loan tax offset hardship refund works and if you meet the eligibility requirements.

What is a student loan tax offset?

A student loan tax offset is when the U.S. Department of Education and the U.S. Department of the Treasury withhold your federal income tax refund to repay your defaulted federal student loans. You may have defaulted if you haven’t made payments on your federal Direct Loans or FFEL loans for 270 days, or if you’ve failed to make a Federal Perkins Loan payment by the due date.

When you default on your student loan, it can enter collections. As part of the collections process for federal student loans, your tax refund could be withheld.

How the coronavirus has 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 protection is in place through Nov. 1, 2022, six months after the federal student loan payment pause ends. This relief means that your 2020 and 2021 tax refunds cannot be offset if you have defaulted 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. To get a refund, contact the Default Resolution Group.

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.

Here are a few examples of when you may be able to refute the offset:

  • Identity theft: If the loan cited in the offset letter is not yours, it could be a cause 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. For one, you can apply for the offset hardship refund, which gives you back the money withheld from your tax return. You can also contact your loan servicer to try and set up a repayment agreement. In the meantime, if financially possible, start making payments on your loans.

How to qualify for a student loan offset hardship refund

In order 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 or without residence.
  • 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, you’ll need to figure out which agency withheld your tax return. You can also contact the Treasury Offset Program (TOP) at 800-304-3107 for more information. Once you find out which agency is withholding your tax return, contact it to receive the student loan tax offset hardship refund form. If you have a defaulted federal education loan, you can contact the Department of Education’s Default Resolution Group.

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 to make your student loan repayment easier:

  • Refinancing: Refinancing can be a useful way to consolidate your student loans under one loan to gain a lower interest rate and better terms. The only downside is that your credit score will impact your interest and approval rates, so always check the lender requirements before applying.
  • Deferment: Student loan deferment allows you to temporarily stall your payments, and interest does not accrue on subsidized loans. Federal student loans have several 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’re having a difficult time 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.

Learn more: