Today on this Tax Day, the National Consumer Law Center (NCLC) has released Voices of Despair: How Seizing the EITC Is Leaving Student Loan Borrowers Homeless and Hopeless During a Pandemic. The updated report builds on a 2018 NCLC report that compiled stories from dozens of borrowers recounting the hardship caused by the federal government’s seizure of their Earned Income Tax Credits (EITCs) because of defaulted student loans, and lays out what Congress can do to remedy this destructive practice that is ripping families apart. The report contains borrowers’ stories, unedited and in full.
Even this year, during a global pandemic and in the midst of record unemployment, the Department of Education has continued to seize borrowers’ EITCs. Even though the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) required the Department of Education to suspend all student loan collection activity until September 30, 2020, some borrowers are still losing the EITC that they and their families rely on.
The EITC is an anti-poverty government program that provides crucial support to low-income working families. It is calculated based on the worker’s earnings, up to a cap. The credit is fully refundable, meaning that if a family’s EITC is greater than its income tax liability, the excess is paid as a tax refund.
Low-income working families rely on the EITC to help them stay employed, keep their families housed and fed, and weather financial crises. The pandemic demonstrates just how important a program like the EITC is. But for many low-income and vulnerable student loan borrowers, financial crises are not limited to global pandemics.
The report released today highlights some of the common themes from borrowers and shows the devastating impact of confiscating these funds from low-income working families. Specifically the stories in this report highlights how:
- The seizure of the EITC impairs workers’ ability to get and keep jobs;
- The loss of the EITC causes or exacerbates housing and other financial instability;
- The EITC is critical for families caring for children or other family members;
- Many borrowers need the EITC to pay for basic necessities;
- Many borrowers did not receive notice that their refund would be taken; and
- The COVID-19 pandemic has impacted borrowers and highlights why borrowers need their EITCs.
The National Consumer Law Center has long advocated for an end to the policy of seizing EITC refunds from distressed borrowers. In 2019, U.S. House of Representative Sylvia Garcia (D-TX) and 12 co-sponsors introduced the Stop EITC and CTC Seizures Act, which would protect student loan borrowers from having their EITCs and Child Tax Credits seized to repay defaulted federal loans.
This report calls for:
- An immediate ban on the seizure of the EITC;
- The immediate reimbursement of the seized payments of all borrowers who had tax refunds taken for tax year 2019; and
- An overhaul of the country’s draconian student loan debt collection and default policies, which threaten borrowers’ financial security.
Because of the CARES Act, defaulted borrowers whose returns are processed after March 12 should not have their tax refunds taken this year. If the refund is seized, borrowers should contact their lender immediately about getting it returned. In the meantime, borrowers may be able to stop future tax offsets by getting out of default. 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 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. This March 2018 blog post has helpful information for borrowers about offset of tax refunds to pay student loans.
