If You Have Student Loans, You Need To Know About Tax Garnishments
Many college graduates find that student loan debts are difficult to pay off. Many Americans with student loan debt choose to live frugally while chipping away at their massive debt. Others take advantage of student loan debt forgiveness programs or income-driven repayment programs. Whatever path you choose to pay off your student loan debt, it will likely require some sacrifice on your part. Failing to stay current on your student loan debt can have major consequences: borrowers who are in default could have to face any of the following:
- A Lowered Credit Score
- Loss Of Tax Refunds
- Withholding Of Social Security
- Exorbitant Collection Fees
- Wage Garnishment
For most Americans who are struggling to pay student loan debt, these consequences are devastating. If you are facing any of the garnishments or penalties listed above, contact an attorney at Galler Law.
Dealing With Tax Offsets
One of the most common ways that the government attempts to collect student loan debt is garnishing tax refunds. The Treasury Offset Program (created in 1986) allows the government to do this. Many borrowers in the U.S. mistakenly believe that they need to give the IRS permission to confiscate tax refunds.
Unfortunately, this is not the case, as the government has the authority to garnish your tax refund and apply it to your student loan debt without your permission. The one positive is that any money remaining after the student loan principal, interest, and fees are deducted gets refunded to you.
If you are married and filing your taxes jointly with your spouse, be warned: the government can confiscate your entire refund, regardless of whether both partners owe student loan debt. This means that if you have substantial student loan debt that you haven’t been paying back, your spouse will not get their portion of the refund. Of course, this also means that if your spouse is in default, you won’t get your portion of your tax refund, even if you don’t have any student loan debt.
This is a harsh reality that borrowers face. Another harsh reality is that there is no statute of limitations on federal student loans. This means that the government can continue to garnish your tax refunds until your loan is repaid. One thing to note: the government is required to notify you before garnishing your tax refund, and you do have time to respond. If you think your refund is being erroneously confiscated, contact Galler Law today.
How To Stop Your Tax Refund From Being Garnished
Here at Galler Law, we advise clients that their tax refunds will only be garnished if they are sufficiently in default on their student loans. Borrowers who are in a student loan debt repayment plan and are making on-time payments do not have to worry about their tax returns being garnished. This is true regardless of the total debt owed. T
his raises the natural follow-up question, “What does it mean to be in default?” The answer depends on the student loan program that you are in. Borrowers with loans that were granted through the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program are considered to be in default when payments have not been made for at least 270 days.
For borrowers in the Federal Perkins Loan Program, default begins as soon as a payment is missed. All that is to say, the best way to avoid having your tax refund garnished, as well as several other consequences, is to make your payments on time and in full.
Other Consequences Of Defaulting On Your Student Loans
Unfortunately, the bad news gets worse: there are several other consequences that you could face for defaulting on your student loans. For one, you could end up having to repay the entire balance of your loan immediately, under what is called “acceleration.” When you are in default, you can no longer apply for student loan deferment or forbearance (these options allow you to delay repayment on your student loans.
With forbearance, your loans will still accrue interest, while deferment typically allows you to delay repayment without accruing additional interest). If your student loan is in default, you also lose the ability to qualify for federal student aid, should you need it in the future. To make matters worse, the government can even withhold your college transcript if your loan is in default.
Getting Out Of Default
OK, so we’ve established that defaulting on your student loans can have harsh and wide-ranging consequences. The question is, how do you get your student loans out of default status? Essentially, there are 3 ways that you can get your student loans out of default:
- Through Loan Consolidation
- Through Loan Rehabilitation
- Through Repayment In Full
If your student loan is in default status, you do have the option to consolidate your loans into a Direct Consolidation Loan. There are, however, a few criteria that you need to meet before pursuing this option. For one, if your wages are being garnished, that garnishment must be lifted. Also, you must agree to either pay your new loan through an income-driven repayment plan or make three consecutive on-time payments on the defaulted loan.
Under loan rehabilitation, you sign an agreement with your creditor stating that you will agree to make nine consecutive on-time payments, equalling 15% of your discretionary income. This option requires you to document your income with the loan holder. Once these payments are made, your loan will move out of rehabilitation status, and you will be able to apply for deferment/forbearance if need be.
The other option for getting out of default status is repaying your loan in full. This is the quickest, though most difficult, way to get out of default. The problem is that most borrowers don’t have the money to repay the loan in full, especially if they are struggling to make monthly payments. If you have questions about how you can lift the burden of student loan default, contact Galler Law for a consultation.