As the tax season comes to an end, fortunate taxpayers have received or are waiting anxiously for refunds to arrive. But by now, many student loan borrowers have learned the hard way that the federal government will take their tax refunds, including their Earned Income Tax Credit, if they are in default on a federal loan.
The EITC is incredibly important to working families, not only alleviating existing poverty, but also helping to lift future generations out of poverty. The credit, which is based upon the family’s income and size, 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. For this last tax year, the EITC could be as much as $6,557.
Seizing the EITC that a family needs for basic essentials can be devastating. One father shared his story with the National Consumer Law Center in response to a blog post:
“I am a struggling single father of twin 7-year-olds. I work hard for my money and I only make $11.50 an hour. I handle all the bills and all of my children’s needs the best that I can, but I fell behind on my rent and my car broke down, which is my only transportation to work. I was desperately waiting for my taxes and my earned income credit so I could pay my rent and fix my car. All of that was offset due to old student loans; now I can’t pay my rent or fix my car so I can’t go to work. Now me and my kids are probably going to have to move into a homeless shelter due to the fact that I can’t pay my back rent. And now I can’t even go to work because I can’t fix my car.”
This father’s story is not unique. At the National Consumer Law Center we continue to hear from student loan borrowers almost every week, with stories just as harrowing. Many borrowers describe the things their growing children would have to do without — clothing for the next season, a bed to sleep in, medical care, a roof over their heads and in some cases, food in their bellies. We published nearly 40 of these stories in our report, “VOICES OF DESPAIR: Student Borrowers Kept in Poverty When Government Seizes Their Earned Income Tax Credit” (2018).
The total number of borrowers impacted is impossible to quantify. According to data from the U.S. Department of Treasury, the U.S. Department of Education recovered more than $2 billion dollars from over a million borrowers in tax refunds last fiscal year. However, the government does not track how much of that comes from the EITC.
The government’s policy of seizing federal student loan borrowers’ EITC refunds runs counter to almost every goal Congress set for the EITC and its student loan programs. These programs were designed to support economic mobility and achievement of financial stability for low-income Americans working toward a better future and to help lift future generations out of poverty.
When the federal government seizes EITC refund checks from student loan borrowers in distress, it does the opposite. Seizing the EITC traps low-income working families in poverty by making it harder to access work, keep stable and safe housing, and pay for basic necessities and medical care, and yes, their student loans. Worse, the main victims of EITC seizures are children, since by far the largest EITC payments go to families with children, and the confiscation of these vital funds can have a dramatic impact on children’s well-being.
This policy also compounds the harms borne by low-income borrowers, who in many cases were denied the promised benefits of education: They were lured in to attend a fraudulent school or a school that closed in mid-course or life circumstances forced them to leave the school before completing the course of study. Systemic obstacles, a lack of effective support, and abusive practices often precede a borrower’s default.
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, Congress must end this practice.
Persis Yu is a staff attorney at the National Consumer Law Center and director of NCLC’s Student Loan Borrower Assistance Project.
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