Student Loan Defaulters Won’t Get Tax Refunds

In a scene expected to be repeated by up to 750,000 Americans over the next few months, more than 1,600 taxpayers will discover Monday that all or part of their 1985 federal tax refunds have been withheld to pay delinquent student loans, according to Reagan Administration officials.

At the Education Department, spokesman Richard Hastings said Friday: “We’ll be getting multimillion dollars every week for the next several weeks as the Internal Revenue Service sends many student loan defaulters a notice instead of a refund check.”

Those affected by the first round of so-called “refund offsets” were notified last summer of the coming change in IRS regulations but did not respond to requests for payment. About $14 million was received from those who did decide to pay up, Hastings said.

“The people getting these notices next week are those who filed early returns,” IRS spokesman Wilson Fadely said. “Generally, it will take about 10 weeks from the time a taxpayer files a return to when he receives a refund or notice.”

$112-Million Yield

The new method of recovering loans is expected to yield $112 million this year, which will be turned over to the Treasury Department and applied to more than $1 billion in defaulted student loans, Fadely said. Hastings explained that the names of about 18,000 defaulters were sent to federal prosecutors last year but said that “our new tool is the use of the IRS.”

If a loan is owed, “when the return is entered on the national computer, it will automatically spit out a letter to the taxpayer,” Fadely said.

Taxpayers who challenge the withholding of their refunds will have to submit a statement to the Education Department to prove they are not in default.

‘Don’t Call the IRS’

“If anyone has a problem with this, don’t call the IRS,” Fadely said. “As far as this process is concerned, we are acting very mechanically. The IRS has not been involved in individual agency decisions to classify a debt as overdue and submit it for offset.”

He added: “We’ve had a few calls from people who wanted to check and see if their names were on the computer, but we are expecting most people to contact the loan agency.”

Although student loan defaulters make up the bulk of the “refund offset” program, the Veterans Administration, Small Business Administration and Housing and Urban Development and Agriculture departments also will use the process to collect various types of delinquent payments.

Since Jan. 1, tax officials have processed 189,000 refunds averaging $563. They expect to process 104 million tax returns this year.