FACT SHEET ABOUT STUDENT LOANS AND TAX REFUND INTERCEPTION
FACT SHEET ABOUT STUDENT LOANS AND TAX REFUND INTERCEPTION
Many of our LUDR clients are in default of their student loans. Following is some information concerning how to deal with these defaulted loans.
TAX REFUND INTERCEPTION
All students in default on their student loans each year will receive a notice of an impending tax refund intercept. In other words the government is going to keep the refund and apply it to the balance due on the student loan.
The notice will contain a form with boxes to check off why the student does not owe the loan. Send the form back promptly.
Because there is widespread allegations that services ignore student requests for hearing, deny requests for hearings on inadequate grounds, ignore valid student defenses, or simply fail to respond in any way to a student request concerning impending intercepts, the form should be mailed RETURN RECEIPT REQUESTED. A file should be created with copies of all correspondence and students should expect much frustration and delay in any attempt to obtain due process prior to tax intercept.
Initial review is with a guarantor, collector, or other services. The student can request a further review by the Department of Education, but only if that request is made within seven days after the services initial determination.
GROUNDS TO STOP A TAX REFUND INTERCEPT
One method of stopping a tax refund intercept is to immediately request a reasonable and affordable payment plan to renew eligibility. It-is critical to use the magic words "to renew eligibility". If this is not appropriate, the student can use alternative magic words by requesting a reasonable and affordable plan to "become eligible for loan consolidation" or "to rehabilitate the loan".
A student on such a plan can then check the box that says the student has entered into a repayment agreement with the guarantee agent or with the Department of Education and the student is making payments as required. This is a complete defense to a tax refund intercept.
Student Loans Tax Refund Interception
Another important defense is the school failed to pay the student an owed refund. While the Department of Education ignores many school related defenses, it recognizes this defense, at least for the purposes of tax refund intercept. A student should check this box whenever possible, with any supporting information. The servicer will assume that the borrower is obligated to pay the full refund amounts less the amount that was not refunded. Consequently if the amount the borrower owes is less than the refund due, this will provide a defense to the tax intercept.
Another effective approach is to check boxes as to the eligibility for a closed school or false certification discharge. Then the tax intercept servicer must confirm the school's closing date in the case of a closed school discharge request, and then for either type of discharge, mail the student the applicable discharge form. The student must return this form within sixty days. The tax intercepts servicer will not certify the loan for offset until and unless it determines that the borrower fails to qualify for the discharge.
Defenses to a tax refund intercept also exist where the debtor has filed bankruptcy or the loan is discharged in a bankruptcy. Other grounds that may apply include the repayment of the loan, incorrect social security number where the student does not owe the loan, the death or totally and permanently disabled debtor.
QUALIFYING FOR AN ECONOMIC HARDSHIP DEFERMENT
Economic hardship deferment is an important student right that allows the borrower to defer payments for up to three years and avoid all collection activity and charges. For most types of loans, the government pays all accrued interest during the deferment period.
Those who have not made payments on a student loan for over a year are not eligible for deferment unless they first obtain a consolidated loan. (If the student's condition qualifies for an economic hardship deferment within six months of the first loan nonpayment, the student can obtain the deferment as long as the student actually applies within twelve months of the first nonpayment.) In addition, the economic hardship deferment only applies to student's loans or consolidated loans issued after July 1, 1993.
Individuals qualify for the economic hardship if they can pass any one of the four tests relating to income. These tests include:
1. An individual qualifies for an economic hardship deferment if that individual is working full time and the earnings from the full time job (not including other sources of income) are no more than the greater of the minimum wage or the federal poverty level for a family of two. This works out to be about $850 per month.
2. A borrower working full time also qualifies for a deferment if the "federal education debt burden" is at least 20% of the borrower's total monthly gross income, and the borrower's income minus that burden is less then 220% of the greater of the minimum wage for federal poverty level for a family of two. Federal education debt burden is a defined term, that calculates the debt assuming that the loan will be paid out over ten years.
For example, an individual qualifies for a deferment with an income of $25,000 if the "federal education debt burden" on an annual basis is $5,000. The debt burden is at least 20% of the gross income. In addition, gross income less debt burden ($25,000 less $5,000 = $20,000) see the poverty level or family of two ($10,360) by less then 220%. Thus the individual qualifies for a deferment.
3. The test applies to those whose total monthly gross income from all sources does not exceed twice the minimum wage or twice the poverty level for a family of two (whichever is higher). This works out to be about $1,700 per month. These individuals, deduct the "federal education debt burden" from the income. The individual qualifies for a deferment if the difference does not exceed the greater of minimum wage or the poverty level for a family of two (normally about $850).
For example, if an individual has an unearned income and a part time income of $15,000, and an educational burden of $5,000, the individual qualifies for a deferment under this test. The individual who is unemployed, or only occasionally employed part time, will generally qualify for an economic hardship deferment, as long as that individual does not have significant sources of other income.
NEW CONSOLIDATION LOAN DEVELOPMENTS
Students no longer need to send in a form to obtain a direct consolidation loan application; they may call 1-800-557-7392. Besides sending a direct consolidation loan application, this call will also advise students of their obligation to contact the lender about a FFEL consolidation loan, to determine whether that or a direct consolidation loan is preferable to the student. For most low income students, the direct loan consolidation will be preferable because payments can be as low as zero, while the FFEL consolidation will require at least payment of the accrued interest. The student is thus eligible for direct loan because the student prefers that to the FFEL consolidation.
There is another important benefit of the direct loan consolidation over FFEL consolidation for those in default. The direct loan consolidation is immediate, while the student must first make three reasonable and affordable monthly payments to obtain the FFEL consolidation. Students in default should take advantage now of this immediate right to obtain direct consolidation loans -- the Department of Education is considering also requiring that students make three reasonable and affordable payments as a precondition of a direct consolidation loan. Below is a table as to the payments under a direct consolidation loan.
LUDR CLIENTS WHO HAVE STUDENT LOANS SHOULD CAREFULLY REVIEW THE ABOVE INFORMATION. IF THERE ARE ANY QUESTIONS CONCERNING ANY OF THE INFORMATION REPORTED ABOVE, CONTACT YOUR LUDR COUNSELOR OR SUPERVISING ATTORNEY, JERRY LAMET.