In the event of a federal student loan borrower’s default on a federal student loan, federal law related to the collection of debts owed to the government allows the Department of Education to request that the U.S. Department of the Treasury withhold money from the borrower’s federal income tax refunds. This withholding, sometimes called a “Treasury offset” or “tax return intercept” will continue until the defaulted loan is paid in full or taken out of default.
Similarly, if the borrower has a defaulted FFEL loan that is held by a guaranty agency, the borrower’s state tax refunds may be also withheld and applied toward repayment of that loan.
Before the offset begins, a notice of pending offset will be sent to the borrower’s last known address to notify that the offset is scheduled to begin in 65-days. The notice may only be sent once, and offsets will continue until the debt is paid.
The offset process is managed by the Bureau of the Fiscal Service of the Department of Treasury. Before referring a debt to FMS for collection, the Department of Education must provide the borrower with notice.
The borrower may request a review within 20-days of receiving the notice of offset or if the borrower requested documents to review, within 15-days after those documents are received. The borrower has the right to first review and copy relevant documents.
The borrower may also request an oral hearing instead of a written review but must send an explanation of why a written review is inadequate.
A defaulted borrower may also request a reduction or suspension of an offset due to a hardship. It is up to the Department of Education’s discretion whether to grant this such a reduction or suspension.
To consider such a request the Department of Education requires that the following documents be submitted:
- The notification of offset;
- The notification letter showing the amount of federal benefit;
- Proof of yearly income;
- A completed financial statement that must be returned to the Department of Education or guaranty agency within ten days. If the situation is an emergency, the borrower may submit equivalent information such as an eviction notice or a court order of foreclosure in writing with the completed financial statement.
- A letter explaining the exceptional circumstances that caused the financial hardship along with any other supporting documents.