Can Your Taxes Be Withheld if You Have Outstanding Student Loans?
If you are severely delinquent on your student loan payments, one of the consequences is that you might not get your income tax refund. This is called a tax refund offset, and the federal or state government sends your refund to the lender to repay your loan instead of to you to use as you please. However, this happens only under specific circumstances.
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Defaulted Loans
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Only student loans that are currently in default can trigger a tax refund offset. If you are paying your student loan as agreed or are a few months late on payments but not yet in default, the loan servicer cannot order your tax refund to be withheld. In the case of federal student loans, the loan does not go into default until you have failed to make a payment for 270 to 360 days, depending on the type of loan.
Government Lender
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Loans issued by or guaranteed by the government are the only ones subject to tax refund offsets. Private student loans cannot trigger withholding of your tax refund. The federal government can take your federal tax refund and your state tax refund. The state government can only take your state tax refund for loans issued by or guaranteed by that state's financial aid agency.
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Advance Notice
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The federal government must notify you in advance of offsetting your tax refund. However, this notice might not reach you if you have an old address on file with your loan servicing company. This is why it is important to keep your address up-to-date. After receiving a notice, you have 65 days to prevent the tax refund offset by voluntarily entering repayment again and making at least your first payment. Another way to prevent the tax refund offset is to prove that it would cause you severe financial hardship, such as eviction or the inability to pay significant medical expenses.
Considerations
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If you file taxes with your spouse but only one of you has a student loan for which your refund is being offset, the other spouse can claim his portion of the refund. File an injured spouse claim on Form 8379 to get his part of the refund that came from the money withheld from his paycheck. Another way to reduce the amount of the tax refund offset is to reduce the withholding with your employer so you get larger paychecks and a smaller refund.
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