How to Qualify for Student Loan Clearing Hardship Repayment
How to Qualify for Student Loan Clearing Hardship Repayment

This article was originally published on by Hanneh Bareham.

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If you’ve received notice in the mail that you’re at risk of federal student loan tax offset — meaning your federal income tax refund could be withheld by the government — you have a choice. If you qualify, a tax hardship refund for student loans allows you to recover the money taken from your tax return.

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

What is a student loan tax offset?

Student loan tax offset occurs when the U.S. Department of Education and the U.S. Department of Treasury withholds your federal income tax refund to pay off your defaulted federal student loans. You can have by default if you have not made payments on your Federal Direct Loans or FFEL Loans for 270 days, or if you have not made a Perkins Federal Loan payment by the due date.

When you default on your student loan, it can go into collection. As part of the federal student loan collection process, your tax refund may be withheld.

How the coronavirus has affected tax offsets

At the start of the pandemic, the government suspended collection activities for federally held student loans and defaulted FFEL loans. This protection is in place until November 1, 2022, six months after the End of federal student loan payment pause. This relief means that your 2020 and 2021 tax refunds cannot be offset if you have federal student loans in default.

This relief was implemented on March 13, 2020; if your tax refund was withheld on or after this date, you may be entitled to a refund. To obtain a refund, contact the Default resolution group.

What to do if you receive student loan tax compensation

If you are at risk for a Student Loan Tax Offset, you will receive notice by mail sent to your last known address. If you think you shouldn’t receive the notice, the first thing to do is check the validity of the tax offset. You have 65 days between your compensation notice and the start of compensation, so it’s important to report inaccurate information as soon as possible.

Here are some examples of when you might be able to refute lag:

  • Identity theft: If the loan quoted in the compensation letter is not yours, it could be a cause for identity theft.

  • Bankruptcy: If you have declared bankruptcy, you may be able to suspend compensation.

  • You have already paid the debt: If you signed up for a repayment plan agreement and are paying off your debt, or if 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. On the one hand, you can apply for the compensatory reimbursement for hardship, which returns the money withheld from your tax return. You can also contact your loan manager to try to set up a repayment agreement. In the meantime, if financially possible, start repaying your loans.

How to qualify for a student loan repayment in the event of compensatory hardship

In order to qualify for a student loan tax refund, you will need to provide proof of serious financial hardship. Eligible circumstances may include:

  • You are currently homeless or without a residence.

  • You are permanently disabled.

  • You have declared bankruptcy and the loan has been cancelled.

  • You have finished your unemployment benefits.

If you think you qualify, you will need to determine which agency withheld your tax return. You can also contact the Treasury Compensation Program (TOP) at 800-304-3107 for more information. Once you find out which agency is withholding your tax return, contact them to receive the Student Loan Tax Offset Hardship Reimbursement Form. If you have an overdue federal student loan, you can contact the Department of Education Default resolution group.

Always check with your agency to see what the hardship tax offset reimbursement requirements are and what documents you will need to provide.

How to avoid tax compensation

The best way to avoid tax offset is to make your required student loan payments on time. However, there are other options to consider to make paying off your student loan easier:

  • Refinancing: Refinancing can be a useful way to consolidate your student loans into one loan for 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’s requirements before applying.

  • Adjournment: Student loan deferral allows you to temporarily suspend your payments and interest does not accrue on subsidized loans. Federal student loans have several specific deferment programs.

  • Abstention: Forbearance will allow you to delay your payments, although interest accrues during the forbearance period. If you are not approved for a deferral, a forbearance may be worth considering.

  • Income Oriented Repayment Plan: If you don’t qualify for a deferral or forbearance, a federal income-driven reimbursement plan may be your best option. There are four options to choose from and you can get the application from your loan officer after discussing which plan is best for you.

The bottom line

If you are having difficulty repaying your student loans, you may face tax compensation. However, it is possible to recover the funds taken from your tax return if you are in extreme financial difficulty. If you need help with your student loan repayment application, contact a student loan attorney or financial planner to help you get on the right track financially.

More from In The Know:

7 realistic tips to save more money every month (even if you don’t earn much)

What to know about the student loan relief program that has been extended until May 2022

Student loan repayments start again in May – here’s how to prepare

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The post office How to Qualify for Student Loan Tax Offset Hardship Repayment appeared first on Aware.


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