Now that income tax filing season is behind us, it is not too early to plan and prepare for 2018. For many taxpayers, the idea of an income tax refund of any amount is welcome, anticipated, and often needed. 
Few people think that they have “too much” money, and as taxpayers continue to receive their IRS income tax refund, folks begin to consider paying off credit cards or making a large purchase. Sadly, however, when Sallie Mae is on one’s personal payroll, that shopping spree or big screen TV may be just a virtual reality. Sallie Mae is the nation's saving, planning, and paying for college company. Their mission is to help American students and families make the dream of higher education a reality through borrowing.
According to a recent article in Time Magazine, about 8 million (education loan) borrowers have given up paying on more than $137 billion in education debts.
What does this mean? If a taxpayer has defaulted on their federal student loans, their refund may not be issued and instead, applied to what is called a tax refund offset.
A tax refund offset generally means the U.S. Treasury has reduced your federal tax refund to pay for certain unpaid debts. If you have unpaid debts, such as overdue child support, state income tax or student loans, the Treasury Department’s Financial Management Service may apply part or all of your tax refund to pay that debt.
Related Read: I Just Received a Huge Tax Refund! Why this may not be a good thing to brag about.
If your federal student loans are in default (you are considered in default when you are 270 days past due), the U.S. Department of Education (ED) can refer your account to the Department of Treasury As a result, the Department of Treasury can withhold your entire IRS tax refund to satisfy the debt that is owed. Additionally, the IRS can withhold your spouse’s tax refund as well.
When Money is Tight: How to prevent going in default:
Many taxpayers with student loans struggle when it comes time to repay the loan. Some have not yet found the job that allows financial freedom while others may have been paying their loans for years and due to situations, have had to tighten their household money belt. What can you do? There are two reasonable recommendations provided by the U.S. Department of Education that can be used to prevent a tax refund offset:
- Consolidate your loans into the Direct Loan Program
“Consolidation is a good idea if you have many loans with a variety of interest rates, some higher, some lower. A consolidation will bundle those loans into one “big” loan at a competitive interest rate.” Said DeAnna Alger, CPA Accounting and Tax Services Senior. This could theoretically, save you money over both the short-and-long term by reducing interest paid and possible penalties or late fees.
- Rehabilitate your loans with your lender
Under a loan rehabilitation agreement, the Department of Education or the guaranty agency will initially offer you a payment amount that is equal to 15 percent of your discretionary income. You will need to provide documentation of your income and agree in writing to:
- Make nine monthly payments,
- Make each payment within 20 days of the due date, and
- Make all nine payments during a period of 10 consecutive months.
“While this is an aggressive payment plan, it allows you a way to get the loan out of default which will avoid your tax offset or wage garnishment,” Alger said.
Obviously, the best way to avoid a tax refund garnishment, as a result of defaulted student loan payments, is to keep making timely monthly payments on your loans. If you are unable to make your monthly payment, it is important to contact your loan holder immediately to discuss your options.
Willfully incorporating Sallie Mae into your personal payroll and household budget is a necessity if you owe education loans. The alternative is not worth the ramification of blemished credit scores, wage garnishment, missed payment fees, or mounting penalties.
Working Sallie Mae into your budget should not begin with a tax time surprise. We advise clients with tax planning that includes the meaningful management of money, both owed and due. Let us help you – we are here for you and ready to start the conversation. Contact me a dalger@zinnerco.com or any of the professionals on staff at 216.831.0733.
