Defaulted student loan borrowers who qualify for the Earned Income Tax Credit (EITC) and/or the Child Tax Credit (CTC) now have a new glimmer of hope. Late last week, Representative Sylvia Garcia introduced the Stop EITC and CTC Seizures Act which would protect student loan borrowers from having their EITC and CTC seized to repay their defaulted federal loan.
As we showed with borrower stories in our report Voice of Despair, seizing EITC payments is a devastating and counterproductive policy. The EITC is extremely important to working families and is effective not only in alleviating existing poverty, but also in lifting future generations out of poverty. Moreover, systemic obstacles, a lack of effective support, and abusive practices often precede a borrower’s default. Taking these funds from low-income borrowers, who in many cases were denied the promised benefits of education, compounds these harms and injures borrowers’ children in meaningful and potentially long-lasting ways.
The effect of the government’s EITC seizures is also punitive. While defaulted low-income borrowers may face EITC seizures of thousands of dollars in a single year, borrowers in good standing with the same amount of debt have notably lower payment obligations, potentially as low as $0 a month. The seizures even penalize borrowers who are actively utilizing programs designed to get their loans out of default and into good standing, impeding their ability to do so.
As Congresswoman Garcia highlighted in her floor speech introducing this new bill, in light of the EITC’s intended purpose of helping to lift working families out of poverty and the harms caused by the seizure of borrowers’ EITC payments, this practice must stop.
While we are waiting for Congress to pass the Stop EITC and CTC Seizures Act, defaulted federal student loan borrowers planning to file their taxes next year should know that any refund they were expecting will likely wind up at the Department of Education (ED) instead of their bank account.
Borrowers may be able to stop a tax offset by getting out of default first, but the timing can be tricky. Importantly, loan rehabilitation—curing a defaulted student loan by making 9 on-time payments in a 10 month period—does not prevent a tax offset until the rehabilitation is complete. Consolidation, similar to refinancing the loan, may be a faster option for eligible borrowers to get out of default and avoid a tax offset.
Most garnishments and offsets can be challenged on the basis of financial hardship, but for tax offsets, the ED has stated that it rarely refunds a tax offset due to financial hardship and will only do so in the case of extreme hardship. It generally limits extreme hardship to imminent eviction or foreclosure.
The IRS provides a toll-free number, (800) 304-3107, to call for information about tax offsets. You can call this number, go through the automated prompts, and see if you have any offsets pending on your social security number. This March 2018 blog post has helpful information for borrowers about offset of tax refunds to pay student loans.
Has this happened to you? How were you planning on using your EITC refund? Tell us your story.
