13. Can I Consolidate a Defaulted Loan?
http://loanconsolidation.ed.gov/help/faq.html#default

Generally, Federal education loan(s) in default may be consolidated in a Direct Consolidation Loan if borrowers:

Agree to repay the loan(s) under the Income Contingent Repayment Plan.

OR
Make satisfactory repayment arrangements with the current loan holder(s).
If, before applying for consolidation, borrowers who want to completely clear the default notation from their credit records, they may want to consider another option: loan rehabilitation. Borrowers should contact their loan holders to obtain more information about this option.

Borrowers cannot consolidate defaulted loans under these conditions:

- If a judgment has been issued against a defaulted loan, it cannot be included in the consolidation unless the judgment order has been vacated (dismissed).

- If they are trying to consolidate defaulted Direct Consolidation Loans.

- If they are trying to consolidate defaulted FFEL Consolidation Loans unless they have made satisfactory repayment arrangements with their current loan holder OR the borrowers agree to repay under the Income Contingent Repayment Plan.

- If they are trying to consolidate defaulted Perkins or health professions loans unless they have made satisfactory repayment arrangements with their current loan holders.

Note: Borrowers with defaulted FFEL or Direct Loan Program loans may be liable for collection costs incurred to collect the loans. If the holder of the defaulted loan, which may be either the U.S. Department of Education or a guaranty agency, retains a collection agency to collect defaulted loans, charges imposed by the collection agency may be added to the amount borrowers owe. This means that the amount of the Direct Consolidation Loan may include collection costs of up to 18.5% of the principal and interest outstanding on the defaulted loan.

For defaulted Perkins Loans and health professions loans, collection costs may equal as much as the amount owed at the time the defaulted loan is paid off through consolidation.

****************
The Income Contingent Payment Plan looks at your income each year, the total amount of federal student loan debt, and the number of people you support in your household to determine your payment amount. You can get a rough calculation of what your payments migh be here:
http://www.ed.gov/offices/OSFAP/DirectLoan/RepayCalc/dlentry2.html

*****************
As for the tax offset, I guess it would all depend on how long it took to get your loans consolidated, and how long before you began making payments. I would guess that the process would stop not long after you began making regular payments.
References :
Direct Loan Consolidation website under FAQs

Federal Student Loans Collections website http://www.ed.gov/offices/OSFAP/DCS/index.html