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According to an agency spokesperson, the Department of Education will not seize tax refunds parents get from the enhanced Child Tax Credit to settle delinquent student loan payments.
Consumer advocates feared that millions of borrowers who defaulted on their federal student loans could get some of the foreclosed credit this tax season. A federal pause on student loans protects borrowers’ tax refunds issued before May 1, but those received afterward are not legally protected.
The Department of Education official said the agency would not withhold refunds attributable to the Child Tax Credit for defaulting borrowers. The agency clarified its position after CNBC published an article on the matter on Tuesday morning, for which the bureau did not initially offer comment.
“The continued pause in student loan repayments has helped protect child tax credits for millions of borrowers, including those in default,” the official, who spoke conditionally, wrote in a statement. sent by email. “The Department of Education will ensure that families do not have their CTC benefits seized through the Treasury compensated this tax season, including refunds issued after May 1.”
The federal government has long been able to collect outstanding debts, such as child support, owed to state and federal agencies. This happens through the Treasury Clearing Program, which allows the government to withhold Social Security checks, tax refunds, and other payments to settle debts.
Such a result would contradict the anti-poverty policy goal of the American Rescue Plan Act, which temporarily improved the value of credit and made it available to more low-income parents in 2021, said the defenders.
“We’re talking thousands of dollars at stake here for low-income families,” said Abby Shafroth, attorney and director of the Student Loan Assistance Project at the National Consumer Law Center. “All these advantages [of the pandemic-relief law would] be lost on families suffering from unaffordable student loans.”
Loans in default
A borrower is generally in default if they are at least 270 days late on federal student loan payments. (Terms may vary by loan type.)
There are approximately 9 million borrowers in default. Half of them are parents with dependent children — the population eligible for the Child Tax Credit, according to a 2019 report by the Institute for College Access and Success.
According to the Institute, low-income students, black students and those graduating from a four-year degree at a for-profit college are more likely to default on student loans than other groups.
The U.S. bailout, which President Joe Biden signed into law in March, raised the maximum value of the child tax credit to $3,000 per child under 18, with a $600 bonus for children under 18. less than 6 years old.
It also expanded credit eligibility by removing an earned income requirement that was a barrier for the poor. It also transformed the tax credit (which is usually issued as a one-time refund during tax season) into a monthly income stream.
Parents received half of the total value of their 2021 tax credit in monthly payments from July to December broken down in increments of up to $250 or $300 per month per child.
These monthly payments were immune from seizure by the federal government, due to the specific wording of the US bailout.
But that same exemption does not apply to the remaining half, which parents receive after filing their tax returns. Parents who have opted out of the monthly payments may have their entire tax credit forfeited.
Borrowers in default could be liable for the entire outstanding balance of their federal loan — not just the overdue portion — due to a mechanism called “acceleration.”
Tax season started on January 24 and ends on April 18 for most people. The IRS is already warning of potential delays in processing tax returns and refunds this year, due to ongoing pandemic challenges. The agency had yet to process 6 million individual tax returns as of December 31 from previous tax years.
(This story has been updated to reflect comments from the Department for Education.)