Education Department won’t seize tax refunds for overdue student loans

Miguel Cardona, U.S. Education Secretary, at the Queen Theatre on Dec. 23, 2020 in Wilmington,…

Education Department won’t seize tax refunds for overdue student loans

Miguel Cardona, U.S. Education Secretary, at the Queen Theatre on Dec. 23, 2020 in Wilmington, Delaware.

Joshua Roberts | Getty Images News | Getty Images

The U.S. Department of Education has suspended the seizure of tax refunds, Social Security and other government payments to satisfy defaulted student loans until November, the agency said.

About 9 million people have a federal student loan in default, which means they’ve fallen at least 270 days behind on payments.

The Education Department — as well as other federal and state agencies — can collect on delinquent debt via the Treasury Offset Program, which intercepts certain payments to recover the owed funds.

Borrowers have gotten a reprieve during the Covid-19 pandemic due to a federal pause on loan payments, interest and collection.

But that policy ends after May 1, fueling concern among consumer advocates that the government would seize tax refunds issued after that date, including benefits like the earned income, child and Recovery Rebate tax credits aimed at low-income households.

However, the Education Department will not restart collection via the Treasury Offset Program for six months after the Covid-19 payment pause ends, according to its Federal Student Aid website. That would be after Nov. 1, if the pause isn’t extended again.

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It appears the department updated its policy last week, though the precise timing is unclear. An agency spokesperson didn’t respond to a request for comment.

“This policy means you won’t lose money from certain government payments, such as the child tax credit, Social Security payments, and tax refunds for the 2022 tax season,” according to the agency website.

It builds on a narrower policy announcement last week that applied only to payments of the child tax credit. After a CNBC inquiry, Education Secretary Miguel Cardona said Feb. 8 that the agency wouldn’t withhold any tax refunds attributed to the child tax credit, even after May 1.

“The intent of these social safety net programs is to protect and prevent people in the U.S. from experiencing crushing poverty — not a reconciliation system for the federal government to use for the student loan portfolio,” said Abigail Seldin, who runs a charitable foundation that focuses on access to public services.

Collecting debts

In 2019, the Treasury Offset Program collected nearly $4.9 billion to service debts held by the Education Department, according to a foundation analysis of publicly available data.

That would be about 78% of the total $6.3 billion in delinquent nontax debt collected that fiscal year.

The government is allowed to seize 100% of federal tax refunds to collect debts associated with child support, unemployment insurance and state income taxes. It can also withhold up to 65% of federal salaries and up to 15% of Social Security payments, for example.

However, certain payments, including those of many means-tested programs, are exempt from offset. The Treasury must also provide 60-day prior notice to the debtor of the intent to offset.

Student borrowers in default will remain vulnerable past Nov. 1, added Seldin, who was a candidate to oversee student loans for the Biden administration.

Default disproportionately impacts borrowers of color, particularly African Americans, as well as students with children, Pell Grant recipients and veterans, according to the Center for American Progress.

Seizing tax refunds from borrowers in default would have run contrary to the poverty-fighting measures of the American Rescue Plan, according to consumer advocates. The pandemic-relief law, which President Joe Biden signed in March, enhanced tax benefits like the earned-income and child tax credits.

Even prepandemic, withholding the earned-income credit, which goes to low-income working families, causes or exacerbates housing and financial instability and impairs workers’ ability to get and keep jobs, according to the National Consumer Law Center.