The Law Dictionary

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Is There a Way to File Income Tax and Get a Refund While Having a Defaulted Student Loan?

As an American worker, you're required to file income taxes after the conclusion of each tax year. Whether you're currently employed or not, you'll be responsible for reporting all of the taxable income that you earned over the course of the year. Taxable income includes wages, interest, capital gains, dividends, unemployment benefits and certain other revenue streams. It doesn't include student loan disbursements that must be repaid after a certain period of time has elapsed.

However, the non-repayable stipends that many graduate institutions issue are typically classed as taxable income. This is an important distinction that eludes many higher education students. If your only source of income over the course of a given year comes in the form of student loan grants, you may not need to file a tax return for that year. On the other hand, you'll need to account for all stipend earnings that you receive during the tax year. Since stipends don't need to be repaid, the Internal Revenue Service treats them as salary payments.

If you become unable to repay the balances on your student loans, the lenders that issued them may force you into default. Once this has occurred, your lenders will be able to recover the unpaid balances on these loans by garnishing your wages and tax refunds. Under current federal law, lenders may garnish up to 25 percent of a delinquent borrower's paycheck and the full amount of their state tax refunds. If the defaulted loans are backed by the federal government, the lenders that issued them may also seize the delinquent borrower's federal tax refund. This action can go on for as long as a judge deems necessary.

If you're in default on some or all of your outstanding student loans, you'll need to continue to file your taxes on an annual basis. Although your state and federal tax refunds will be in serious jeopardy, you may be able to shield a portion of these often-necessary revenue streams from your cash-hungry student lenders.

You have one principal avenue of recourse: the federal court system. If you can successfully convince a judge that the continued seizure of your tax refunds poses a serious financial hardship, he or she may issue a cease-and-desist order that prevents your lenders from continuing their recovery efforts. In order to secure such a judgment, you'll need to demonstrate that your missing tax refunds are necessary to ensure that you remain financially solvent.


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