So I was expecting a nice $5,000 federal tax refund. After not receiving it, I checked on the IRS website about where it was. They said it had been “offset” to a creditor from the US Department of Education.This is a law that allows the federal government, in this case a private debt collection agency contracted by the USDoE, to take ALL of your tax refund for what is owed on defaulted student loans.
So the money is gone, I don’t want to try and get it back. I do hope that it is applied towards the principal and interest accrued on my defaulted loans though, and NOT to pay off some outrageous fee that the collection agency has tacked on to the loan.
I searched a bit and found this tidbit from the nolo legal website:
“Tax Refund Offsets
If the Department of Education takes your tax refund (called a tax refund offset), it cannot charge collection fees. For this reason, you might benefit from a tax refund offset because 100% of the refund will be applied to the principle and interest on your student loan, and 0% will go to collection fees.”
So is this true? Will 100% of the $5,000 be applied to my total principle and interest?
If so, should I wait until the offset is applied before I enter into rehabilitation? Because as it stands I owe about $17,600 in principal and interest, but the collection agency has said they added about $4,400 to the total (a 25% increase!) So assuming the nolo site is correct, my principal and interest will be reduced to $12,600 after the application of the tax refund offset. Then the ridiculous 25% fee added to the remaining balance would mean I am at $15,750. But I also read that if I enter into rehabilitation, that the fee is limited to 18%. Will then my balance be $14,868?
