How To Qualify for the Student Loan Tax Offset Hardship Refund

If you owe money to the federal government, the IRS may withhold some or all of your tax refund to satisfy the debt. When that happens, it is called a tax refund offset.

A student loan offset occurs when you have delinquent student debt owed to the Department of Education. It's possible, however, to recover tax refund offsets if you qualify for a hardship exception. Below, we’ll take a closer look at how the student loan tax offset hardship refund works.

What Is a Student Loan Tax Offset?

A student loan tax offset allows the federal government to collect outstanding debts if you default on federal education loans. This could happen when you miss a loan payment and your loan becomes delinquent. You're then considered to be in default if and when you don't make payments toward your loans for at least 270 consecutive days. This rule applies to Direct Loans and Federal Family Education Loans (FFEL). When it comes to the federal Perkins Loan, you may be in default following the very first time you don't make your payment by the due date.

The Department of Education can seek to recover some or all of what's owed through a student loan tax offset. These requests are handled by the Treasury Department's Bureau of the Fiscal Service (BFS). If a student loan tax offset is being pursued, the BFS will send you a written notice to inform you that your refund is being withheld for unpaid student loan debt. This notice is sent 65 days before the offset is scheduled to begin, giving you time to refute it, or get your finances in order to repay the debt in full.

Who Qualifies for Financial Hardship?

If you know that you owe the student loans in question, you may be able to avoid the offset if you have a demonstrable financial hardship. There are a few situations that may qualify for a hardship exception if your tax refund is offset or delayed.

Proof of Exhausted Unemployment Benefits

If you were receiving unemployment and have exhausted those benefits, you may be able to prove a financial hardship. When submitting a tax hardship refund request, you need to show documentation that you've exhausted your benefits.

Proof of Eviction or Foreclosure

Being evicted or losing your home to foreclosure may make you eligible for a hardship exception. Again, you'll need to provide proof that you've been served with an eviction notice or foreclosure notice.

Utility Disconnect/Shutoff

If you've received a notice from your utility service provider that your service is to be shut off or disconnected for nonpayment, that could be used as proof of hardship. The date on the notice needs to be within three months of the offset date.

Homelessness

Being homeless is a qualifier for a tax refund offset reversal. You'll need to certify you are homeless and have no permanent address.

Total and Permanent Disability

If you've become permanently disabled and can't work, you may be able to claim a hardship exception. You also may be able to seek a discharge of any remaining student loans if a disability prevents you from further earning income to make the payments.

Injured Spouse

Although not necessarily hardship related, you may qualify for a reversal of a student loan tax refund offset as an “injured” spouse. In this case, the term refers to the negatively impacted spouse who does not owe the debt at hand.

You'll need to file Form 8379, Injured Spouse Allocation, with the IRS. The IRS may return your portion of a refund due on a joint return if you can prove you're not responsible for your spouse's education debt.

Loan Repayment/Rehabilitation

You may be able to halt a student loan tax offset within the 65-day window by restarting your repayment plan. Once the 65-day window ends, you can potentially reverse a tax offset by entering federal loan rehabilitation. To qualify, you’ll need to make the first five of nine required payments to qualify.

How To Prevent Student Loan Tax Offsets

If you believe you qualify for a financial hardship exception or you think your refund was withheld in error, there are some things you can do to attempt to get it back. First, contact the BFS at 800-304-3107 (or TTY/TDD 866-297-0517) to get more information and find out where the Treasury Department applied your refund.

Contact the agency that received your tax refund. In the case of student loans, this would be the Department of Education. The Department of Education should be able to tell you which outstanding student loans the refund was applied to. From there, you can contact your loan servicer directly to find out what you need to do next to challenge an offset.

Typically, this involves filling out a form provided by your loan servicer and submitting it to the Treasury Department. You'll need to specify the financial hardship reason for requesting an exception and attach copies of any required supporting documentation (i.e. eviction notices, utility disconnect statements, etc.)

At this point, the Treasury Department would review your application and documentation to decide if you qualify for a financial hardship. Keep in mind that if you're granted a financial hardship exception and your refund offset is returned, this may be a one-time thing. You may not be eligible for future hardship exemptions if your loans are still in default.

The Bottom Line

A student loan tax offset may temporarily derail your financial plans, but it is possible to get your money back if you have an eligible financial hardship. If you're struggling to keep up with student loan payments, talking to your lenders could help you to avoid default. Your lender may be able to help with restructuring payments or placing loans in deferment or forbearance until your financial situation stabilizes.

Frequently Asked Questions (FAQs)