By Persis Yu and Seth Frotman
On Monday, the Biden Administration will host a national day of awareness around the Child Tax Credit (CTC). This key benefit offers low- and moderate- income working families with dependent children thousands of dollars of cash relief per child, and President Biden’s American Rescue Plan vastly increased both the amount and flexibility of aid that the CTC makes available. The White House’s efforts to draw attention to this vital protection against childhood poverty are hugely important for America’s families, and the administration’s successful work to expand the CTC is correctly described as “a remarkable accomplishment” that may “make as enduring a dent on poverty as LBJ did decades ago.”
However, unless the administration takes swift and decisive action, cash made available through one of “the most important tools that the nation has in its arsenal to fight poverty” will soon be denied to struggling student loan borrowers and instead intercepted by the Department of Education (ED). In particular, unless the Biden administration takes action, many CTC recipients who are in default on federal student loans will have this critical benefit seized come next tax season. For those student loan borrowers—and, most importantly, for their children—this entirely preventable outcome will unwind Joe Biden’s signature achievement.
While Congress should act to permanently protect the CTC and other refundable tax credits from garnishment, there are clear steps the administration can and must take under powers it already has to prevent harm, thanks, in part, to the first COVID relief measure passed back in March 2020. This law, known as the CARES Act, suspended student loan payments and interest charges for tens of millions of student loan borrowers and further provided that ED “shall deem each month for which a loan payment was suspended . . . as if the borrower of the loan had made a payment for the purpose of any loan forgiveness program or loan rehabilitation program . . . . ” That means that any time that borrowers have spent under the ongoing payment pause—which was extended by both the Trump and Biden Administrations—may be counted toward the federal “rehabilitation” program that gets student loans out of default.
With 14 months already passed since the pause began in March 2020 and only 9 months of payment necessary to qualify for loan rehabilitation, the Department has the authority to make every single borrower in default eligible to be current on their loans. And that means borrowers can avoid the pernicious debt collection tactics used against borrowers in default—including the seizure of CTC payments along with other anti-poverty payments, such as the Earned Income Tax Credit (EITC).
Struggling student loan borrowers have too often been cut out of America’s social safety net. For example, Social Security has been described as “the most important and effective income support program ever introduced in the United States,” yet the government’s own accounting shows that tens of thousands of seniors who are in default on student loans are pushed into poverty each year through the withholding of Social Security benefits. Similarly, the EITC has been called “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress,” but vulnerable families across the country regularly struggle to keep a roof over their head after the government seizes their EITC benefits because of defaulted student loans.
Now, after more than a year of job losses that have been highly concentrated among single mothers and a nationwide rise in childhood hunger, families that are entitled to the CTC but that are in default on student loan debt are on track for a similar fate.
The importance of the CTC to American families is hard to overstate. Researchers estimate that in July, when 39 million American households begin receiving the expanded CTC benefits made available under the American Rescue Plan, five million children will be lifted out of poverty and the rate of childhood hunger will be cut by more than half. This effect is projected to be especially important for children of color.
But for the close to 9 million federal student loan borrowers currently in default, these benefits will be unavailable. With the nationwide eviction moratorium expiring at the end of June, it is no exaggeration to say that if the Biden Administration allows CTC benefits to be taken from student loan borrowers, the result will be children going hungry and families forced out of their homes.
ED can and must act to automatically remove borrowers from default and ensure that they are current. This simple step will not only protect struggling families from having their CTC payments seized when they next file their taxes; it will also set borrowers up for financial success, protecting them from forced collection that can take thousands of dollars per year from their already tight budgets and making them eligible for a range of other protections and payment options denied to borrowers in default.
Moreover, these borrowers’ exit from default provides a key moment for the administration to consider broader reforms to our broken student loan debt collection system, which the COVID pandemic has revealed to be in need of dramatic reform.
On Monday, the administration will celebrate the respite it has offered American children from the crushing weight of poverty. The question for President Biden and Education Secretary Miguel Cardona is whether children should be denied that relief because their parents are among the millions of Americans struggling with student debt.
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Persis Yu is a staff attorney at NCLC and is the director of NCLC’s Student Loan Borrower Assistance Project. She also works on other consumer advocacy issues.
Seth Frotman is the Executive Director of the Student Borrower Protection Center. He previously served as Assistant Director and Student Loan Ombudsman at the Consumer Financial Protection Bureau, where he led a government-wide effort to crack down on abuses by the student loan industry and protect borrowers.
