Defaulted student loan borrowers planning to file their taxes should know that any refund they were expecting will likely wind up at the Department of Education (ED) instead of their bank account. Tax refund offsets are one of the powerful tools the government uses to collect defaulted federal student loans.
For many struggling student loan borrowers, their tax refund includes the vital Earned Income Tax Credit (EITC).
The EITC is one of the most important anti-poverty programs available to low-income workers. It is specifically intended to help raise working families with children out of poverty. The Center on Budget and Policy Priorities (CBPP) has cited EITC expansion as the most important cause of employment growth among single mothers with children during the 1990s. In 2013 alone, the program was credited with lifting more than six million people out of poverty, including more than three million children. By seizing EITC payments, ED is harming vulnerable borrowers and their children.
Most garnishments and offsets can be challenged on the basis of financial hardship, but for tax offsets, 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. Borrowers may be able to stop a tax offset by getting out of default first, but the timing can be tricky.
The government should not be keep children in poverty in order to force borrowers to repay their student loans.
Has this happened to you? How were you planning on using your EITC refund? Tell us your story.