Borrowers who have stopped repaying their federal student loans may get an unwelcome surprise during tax season: The refunds they were expecting may be withheld by Uncle Sam.þþIn what is called a tax refund “offset,” the government has the right to withhold funds from student loan borrowers who have fallen into default, and apply the money to the loan balance.þþ“It’s very common,” said Adam Minsky, a Boston lawyer who works with student loan borrowers. When clients seek his help with a loan default, he said, “I assume they’ll have a refund issue.”þþThe government notifies borrowers ahead of time that their refunds (and other expected government payments) may be withheld. However, borrowers may not always receive the notices, perhaps because they have moved. Or they may simply be overwhelmed by their financial circumstances and fail to open their mail, said Betsy Mayotte, director of consumer outreach at American Student Assistance.þþ(American Student Assistance, a private nonprofit that has owned and managed student debt since its early days as a federal loan guarantor, now offers counseling and educational services to help families make decisions about college financing.)þþþEven if a borrower does receive the notification letter and opens it, letters from the Treasury Offset Program use a lot of bureaucratic jargon, Mr. Minsky said, so many people still don’t understand that the payments they may be expecting, including tax refunds, will be withheld.þþ“Most people don’t know it’s coming,” Mr. Minsky said.þþThe average federal tax refund is about $2,800, according to the Internal Revenue Service — which means that missing out on a refund may have a big impact on a borrower’s finances.þþIf you fear you may be in this position, one strategy may be to decrease withholding from your regular paycheck, to reduce the size of your potential refund. That doesn’t help, however, with refunds resulting from the earned-income tax credit, paid to low-income workers who claim it on their tax returns, said Persis Yu, director of the Student Loan Borrower Assistance Project, which is run by the National Consumer Law Center.þþAbout eight million federal student loan borrowers were in default at the end of last year, according to Department of Education statistics. (Most federal loans are deemed in default when no payment has been made for 270 days, or about nine months.)þþThe Treasury Department did not immediately respond to a request for information about the number of tax refunds that are withheld because of delinquent student loans.þþHere are some questions and answers about tax refund offsets:þþCan I prevent the offset of my tax refund?þþThe initial notification letter generally gives borrowers 65 days to appeal a referral to the offset program. (It’s possible to buy a bit more time by requesting your loan file, if you do so quickly.) After that, you can still appeal, but the refund will be withheld while your objections are considered, according to the Education Department.þþIf a borrower is married and the couple files a joint tax return, Mr. Minsky said, the borrower’s husband or wife can file a claim with the I.R.S. to receive the portion of the refund due him or her.þþHow can I stop the continued withholding of my tax refunds?þþThe government can withhold refunds and apply them to your student loan balance as long as the loans are in default. While some borrowers may actually see that as a repayment strategy, Ms. Mayotte said, “We encourage people to get into a long-term, sustainable payment plan.”þþBesides paying the loan in full — unlikely for most borrowers — there are two main options for getting out of default: loan rehabilitation and loan consolidation.þþþWith rehabilitation, the borrower agrees to make nine affordable, on-time payments to return the loan to good standing — and then may be eligible for flexible programs that lower monthly payments based on the person’s income.þþWith loan consolidation, the borrower refinances the defaulted loans into a new loan.þþEach option has pros and cons; consolidation is faster, while rehabilitation may be better for your credit report. The Student Loan Borrower Assistance Project offers tools to help you choose which would work best for you.þþDo tax refunds withheld while my loans were in default count toward the nine payments needed to rehabilitate my loans?þþNo. Payments must be made voluntarily to count toward the rehabilitation agreement, the Education Department says.þ
Source: NY Times
