Education Department Says It Won’t Seize Child Tax Credit for Past-due Student Loans

According to an agency spokesperson, the Education Department will not take hold of the tax refunds parents receive from the advanced child tax credit to reconcile past outstanding student loan payments.

Consumer defenders had been concerned that a huge number of borrowers who had failed to repay their federal student loans would get part of the credit held this tax season. A federal pause on student loans safeguard borrowers’ tax refunds released before May 1, but those who got later aren’t lawfully secured.

The Education Department official stated that the agency won’t seize refunds due to the child tax credit for borrowers in default. The agency clarified its situation following a piece that was published on Tuesday morning regarding the matter, for which the bureau did not immediately respond for comment.

In an e-mailed statement, the official, who spoke on the position of background, wrote “The continued pause on student loan payments has helped protect Child Tax Credits for millions of borrowers, including those in default,” adding “The Department of Education will ensure that families will not see their CTC benefits garnished through Treasury offset this tax season, including those refunds issued after May 1.”

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The federal government has long been capable of collecting past outstanding debts, such as child support, owed to state and federal agencies. This takes place through the Treasury Offset Program, which enables the government to seize Social Security payments, tax refunds, and other payments to settle debts.

Advocates said that such a consequence would be at odds with the poverty-fighting policy objective of the American Rescue Plan Act, which improved the credit’s value for a while and made it available for more parents having low income in 2021.

Abby Shafroth, an attorney and director of the student loan borrower assistance project at the National Consumer Law Center, said “We’re talking of many thousands of dollars on the line here for low-income families,” adding further “All those benefits [of the pandemic-relief law would] be lost for families suffering from unaffordable student loans.”

child tax credit
child tax credit

Loans in Default

A borrower is typically in default if they are late by at least 270 days on federal student loan payments. (The period may be different depending upon loan type.)

According to a 2019 report from the Institute for College Access and Success, there are approximately 9 million borrowers in default. Among them, half are parents with dependent children, the population entitled to the child tax credit.

Students with low earnings, Black students, and those earning a four-year degree from a for-profit college have more tendency to fail to repay their student loans as compared to other groups, according to the Institute.

The American Rescue Plan, which was signed into law by President Joe Biden in March, increased the maximum value of the child tax credit to $3,000 for each child below the age of 18, with a $600 bonus for children below the age of 6.

It also expanded eligibility criteria for the credit by withdrawing earned-income criteria that turned out as a roadblock for the low earning people. It also converted the tax credit (which is generally issued as a one-time refund during tax season) into a monthly income stream.

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Withholding the Credit

Parents received half the entire amount of their 2021 tax credit in monthly payments starting from July till December spread in increments of up to $250 or $300 per month for each child.

Those monthly payments were secured from withholding by the federal government, because of the definite language under the American Rescue Plan.

But that same exemption isn’t applicable for the rest of the amount, which parents are entitled to receive after they file their income tax returns. Parents who preferred to opt-out of the monthly payments may receive their entire tax credit withheld as a consequence.

Borrowers in default could be at the helm for the whole outstanding balance of their federal loan, not only the past outstanding loan, as a result of a mechanism called “acceleration.”  

Tax season started on January 24 and ends on April 18 for the maximum Americans. The IRS is already cautioning of probable postponements about the processing of tax returns and refunds in 2022, as a consequence of existing challenges due to pandemics. The agency had 6 million individual tax returns that are yet to process as of December 31, from previous tax years.


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