One of the pitfalls of using student loans to pay for college is that you cannot be sure you'll make enough in your career to pay it back. Most federal student loan programs work with borrowers to make this less of a concern if you fall into default status. However, the U.S. Department of Education or a guaranty agency may request that the Internal Revenue Service intercept all or part of your income tax refund to apply toward your debt. There are steps you can take to avoid this happening.
Contact the lender and ask about loan rehabilitation. If you have a Federal Direct Loan or an FFEL loan, you qualify for a rehabilitation program that allows you to make nine payments for an agreed upon amount for nine straight months. At the end of the nine months, the loan is returned to good status and is removed from collections. By agreeing to a rehabilitation program, you can ensure that the lender will not seek to intercept your income tax return. You will need to complete, sign and return loan rehab agreement forms in order to participate in a rehabilitation program.
If the U.S. Department of Education or a guaranty company already requested that the IRS intercept your taxes, you will need to ask to have the lender or guaranty to contact the IRS to cancel the request. Be aware that it takes up to six weeks before the tax offset cancellation can be processed.
File a hardship claim. If you can show that the tax offset is likely to have a severe financial impact on you, the IRS might agree to release your tax refund rather than intercept it. You will need to send your hardship request to the guaranty agency. Include an explanation of why the offset will cause an extreme hardship. You also must include a copy of your income tax form and other proof of income, copies of monthly bills and copies of non-monthly bills that also prove your hardship.
Request a hearing. If the guaranty company fails to accept your prior attempts to stop the tax offset, your last option is a hearing. The IRS will hear your case. You must file a hearing request form. On the form, you must indicate whether you want the hearing to take place in person, by phone or via the mail. When you request the hearing, you must include in your request the reason that the tax offset should not take place. To place the tax offset on hold until the hearing is concluded, you must file a request for review at the address written in the offset notice. You must file the request for review within 65 days of the date of the notice.
Some guaranty companies are able to process a hardship claim by phone. Ask the company how you can apply for hardship and follow the specific requirements for that company.
If the April 15 income tax filing deadline arrives before you have stopped an IRS tax offset, you may benefit from filing a tax extension rather than filing your return. If you file your return before you have removed the tax offset, it is likely that your income tax refund will be intercepted before you are able to address the problem.
If you fail to meet the terms of a student loan rehabilitation program, the lender or guaranty agency can reapply to have your income tax refund intercepted.