A r c h i v e d I n f o r m a t i o n

   FOR RELEASE             Contact:  Stephanie Babyak (202) 401-2311    April 17, 1995                       Jane Glickman (202) 401-1307

IRS Tax Refund Offsets Grab Load Defaulters in the Pocketbook

More than 304,000 taxpayers were surprised when, instead of a check from Uncle Sam, they received a notice that their 1994 federal income tax refund was taken to pay a defaulted student loan.

In the first quarter of this year, an estimated $224 million was collected by the Internal Revenue Service (IRS) working in cooperation with the U.S. Education Department. This amount is likely to increase dramatically with additional last-minute tax filings for 1994. The average amount offset for defaulters was $736.

Since 1986, the first year that IRS tax refunds were withheld, through March 1995, the department has recovered more than $3 billion in offsets of more than 4 million individual tax refunds. In 1994, the department recovered nearly $600 million from more than 780,000 taxpayers.

"Defaulters have a new option to repay their loans with affordable payments and avoid more serious sanctions," said U.S. Secretary of Education Richard Riley.

Borrowers can now voluntarily repay their loans by negotiating a repayment plan based on income and outstanding balance. The same income-contingent loan repayment plan offered by President Clinton's new direct student loan program -- whereby the department obtains income information from the IRS -- is now available to defaulters.

Defaulters who choose not to arrange a voluntary repayment plan with the department may now have their wages garnished. Through this action, the department will require that the employer forward 10 percent of the employee's "disposable" or net pay to the department each pay period.

In Fiscal Year 1994, defaulted student loans cost taxpayers some $2.4 billion. Default costs hit an all-time high of $3.6 billion in FY 1991, but have since dropped steadily as a result of tougher sanctions against high-default schools and continued action against defaulters. The department anticipates default costs should be reduced further due to the income-contingent repayment plan for defaulters.

Defaulters are invited to call the department's toll-free Debt Collection Customer Service, 1-800-621-3115, to establish a payment plan.