Did you know that student loan debt is the second highest consumer debt, second only to mortgage debt?
Reports suggest that there are 44 million borrowers in the United States who owe a combined total of $1.3 trillion in student loans.
Student loan debt has doubled since 2009, while other household debts have not seen similar increases. In fact, total household debt has fallen by 1%.
Student loan debt is an increasingly growing crisis in the United States. The last thing you should do is ignore your student loan debt. Instead, deal with the debt you already have and then take steps to avoid taking on new debts.
Avoiding debt can have long-term repercussions, as it will continue to increase until your creditors take steps to seize they money you owe them.
Your Federal student loan debt is no different. They’ll want to recover all the money that is owed to them. Student loan garnishment is just one of several methods that the Federal Government uses to recover their losses.
The government wants their money back
If you default on your federal student loan, the government will legally try to reclaim the money that you owe them.
The Federal Government will try to reclaim their money via the Treasury Offset Program. The United States Department of the Treasury uses the program to seize federal payments owed to you in order to pay your defaulted debt owed to other federal agencies.
This means that the United States Department of the Treasury can seize up to 100% of your tax refund in order to pay off your defaulted federal student loan.
They don’t need your permission in order to seize money owed to them. However, they are required to give you notice that these funds will be seized.
What happens if your loan goes into default?
If you fail to keep up with payments on your loan, then you will be at risk of defaulting on your loan and having your tax refund taken.
There are several consequences of defaulting on your loan:
- The entire balance, including interest, is due for payment immediately
- You lose eligibility for financial assistance including financial aid and forbearance
- Your loan will be passed over to a collection agency
- The default status will have a negative impact on your credit score
- The effects of default will be felt for years while you try to repay your debts and rebuilt your credit score
Your student loan is at risk of default if there have been no payments made for 270 days.
You will receive notice that the creditor has submitted the debt for a tax offset. This notice will be sent to either the address held on record by your creditor, or the address you last used to file your taxes.
You have the opportunity to appeal the tax offset if you feel you have grounds to do so.
Reasons to appeal a tax offset include:
- The debt has been paid off
- You don’t believe the loan is in default
- You believe you are eligible for discharge or refund
- Disability or death
Your appeal should be submitted 65 days after the date of the notice and should be made in writing to your creditor. If you submit an appeal after 65 days the offset process will not be suspended. If your appeal is successful then your money will be returned to you.
How does the Treasury Offset Program work?
The Bureau of the Fiscal Service’s Debt Management Service (DMS) administers the Treasury Offset Program (TOP). The Fiscal Services DMS is responsible for collecting money that is owed to federal agencies. The Fiscal Services also distribute federal payments (such as tax rebates) to individuals on behalf of agencies making federal payments (such as the IRS).
Payment vouchers are prepared, certified, and then sent to Fiscal Services. The vouchers contain vital information including the name of the recipient and the Tax Identification Number (TIN).
The Fiscal Services will cross-reference the recipient’s name and TIN with the Fiscal Services delinquent debt database. If the recipient’s name and TIN match the name and TIN that the creditors have, then the disbursing officers will withhold (all or part) payment.
The Fiscal Services will then offset and distribute payments among the recipient’s creditors in order to clear the recipient’s debts. This information will be held on record and payments will continue to be offset until the creditors suspend or terminate further payments.
Payments are suspended in the event of bankruptcy or there are other reasons that the creditor feels justifies suspension. Payments are terminated in the event the debt is paid off, the debt is discharged or compromised, or there are other reasons the creditor feels justifies suspension.
The best way to avoid this is to not default on your loans.
In order to avoid defaulting on your loan you will need to:
- Keep up with your loan repayments
- Keep your creditors informed
- Consider debt consolidation or rehabilitation
- Contact the Internal Revenue Service (IRS)
How can you stop the government from taking your taxes?
Keep up with loan repayments
The key to staying out of debt and avoiding default is to make loan repayments on time each month.
In order to keep on top of your repayments you will need to prioritize your debts. Your federal student loan should take priority as they have the power to take actions that other private creditors cannot.
Once you have sorted out your priority debts, you should then concentrate on making payments to other creditors such as credit cards and private loans.
Ideally, if you can, you will keep up with repayments with all your creditors. But if it is a choice between paying your mortgage and paying off a credit card, you should always aim to pay your mortgage first. You can always contact the creditors you are struggling to pay in order to discuss your options.
As long as you are keeping up with your payments on your student loan, the federal government will not be able to take your tax refund.
Keep your creditors informed
If you do find yourself unable to keep up with your loan payments, then you should contact your creditors and discuss your options with them.
If you are struggling to keep up with your student loan payments then you have a few options.
You should look into changing to an income driven repayment plan. If you qualify, it’s a great way to reduce your monthly payments.
There is also the possibility of deferment or forbearance. Deferment temporarily delays the payment and interest of your student loan providing your meet the eligibility requirements. Forbearance allows you to stop making payments or reduce your payments for a period of up to 12 months.
Consider consolidation or rehabilitation
Consolidation is the process of paying all your current debts off with one single debt via a debt consolidation loan. This way you’ll only have to keep track of one monthly payment. In order to be eligible for a consolidation you must make payments under an income driven payment plan or alternatively have made three separate payments on your loan.
Consolidation makes repaying your student loan more manageable since you only have to deal with one creditor.
Rehabilitation is more complex than consolidation. You will be set up with a repayment plan where you will make monthly payments that are equal to 15% of your discretionary income. In order to rehabilitate your loan, you’ll need to make 9 consecutive on time payments.
Consolidation and rehabilitation are both ways to get your student loan out of default. By getting your loan out of default status, you won’t have to worry about your wages being garnished or your tax return being withheld.
Contact the IRS
The TOP allows the federal government to seize payment of your tax refund in order to clear your federal debts. However, you will receive notice before they offset your tax. Once you receive notice, you have 65 days to appeal to a tax offset.
In order to appeal the tax offset you will need to contact your creditors directly.
If you do not receive notice of the tax offset or you have any questions then you can contact the IRS directly.
If you are successful at appealing your student loan garnishment, then you will be able to receive your tax refund.
Student loan debt is becoming an increasingly worrying crisis with total amount of student loan debt doubling since 2009.
It is always best to try to avoid debt. But if you do find yourself with debt, you need to learn how to manage it. It is never advisable to ignore your debts, as creditors will do all that they can in order to recover their losses.
The federal government has many methods available to them in order to recover your federal student loan debt.
Tax garnishment is just one of these methods.
In order to protect yourself from these repercussions, you need to make sure your loan stays out of default.