Feds seized $2.6B in tax re­funds last year

Some find an­tic­i­pated wind­fall ap­plied to de­faulted stu­dent loan debt

USA TODAY US Edition - - FRONT PAGE - Kevin Mc­Coy

Jamie McKnight, 35, a mother of two, filed her fed­eral tax re­turn in late Jan­uary, ex­pect­ing to get a roughly $9,700 re­fund that would help her pay for rent, health care ex­penses and other bills.

What the Kingston, N.Y., res­i­dent didn’t an­tic­i­pate was that noth­ing would show up in her bank ac­count.

McKnight soon dis­cov­ered that the gov­ern­ment had seized the money to ap­ply to her over­due stu­dent loans, which she said to­tal roughly $20,000. She says she didn’t know the loans were in de­fault, or that the feds could re­pay the debt with her re­fund.

“I waited for it to hit my ac­count, and noth­ing hap­pened,” she said. “It’s frus­trat­ing be­cause this was sup­posed to be our safety net.”

As mil­lions of Amer­i­cans marked the na­tion’s April 17 tax-fil­ing dead­line with plans to spend or save re­funds from Uncle Sam, thou­sands of stu­dent loan borrowers such as McKnight weren’t shar­ing the dreams. The fed­eral gov­ern­ment has al­ready taken away their re­funds and ap­plied them to the over­due debts.

Full data show­ing how many stu­dent loan borrowers will be af­fected dur­ing the 2018 fis­cal year isn’t avail­able. How­ever, a USA TO­DAY re­view shows that the U.S. Depart­ment of the Trea­sury dur­ing the 2017 fed­eral fis­cal year col­lected nearly $2.6 bil­lion owed on de­faulted fed­eral stu­dent loans.

The to­tal rep­re­sents the high­est ever in terms of dol­lar col­lec­tions, ac­cord­ing to Trea­sury’s Bureau of the Fis­cal Ser­vice.

The col­lec­tions, rep­re­sent­ing more than 1.3 mil­lion de­faulted fed­eral stu­dent loans, also in­creased by $200 mil­lion from the 2016 fed­eral fis­cal year. Col­lec­tions for fed­eral stu­dent loan debts have risen steadily as the Depart­ment of Ed­u­ca­tion’s debt port­fo­lio in­creases, ac­cord­ing to the Trea­sury bureau.

For­mally known as tax re­fund off­sets, the gov­ern­ment seizures have taken place even as to­tal U.S. stu­dent loan debt has bal­looned to an es­ti­mated all-time high of $1.4 tril­lion. Nearly $5.8 bil­lion in direct fed­eral stu­dent loans en­tered first-time de­faults from July through Septem­ber last year, the high­est quar­terly to­tal since at least 2015, gov­ern­ment records show.

Few dis­pute that stu­dent loan borrowers should be held re­spon­si­ble for re­pay­ing the debts. How­ever, many borrowers fell be­hind on their loans, and later de­faulted, as the na­tion’s 2008 fi­nan­cial cri­sis elim­i­nated jobs, cut salaries and hob­bled the econ­omy. De­spite bet­ter fi­nan­cial times, many borrowers have strug­gled to re­cover.

The Na­tional Con­sumer Law Cen­ter, a non-profit or­ga­ni­za­tion fo­cused on eco­nomic se­cu­rity for low­in­come and other dis­ad­van­taged peo­ple, con­tended in a March re­port that gov­ern­ment seizures of fed­eral tax re­funds of­ten trap strug­gling stu­dent loan borrowers in poverty.

The Depart­ment of Ed­u­ca­tion said it is re­quired by law to re­fer delin­quent or de­faulted stu­dent loan debts to the Trea­sury bureau, which “off­sets (with­holds) the pay­ment, in whole or in part, to sat­isfy the debt to the ex­tent legally al­lowed.”

The re­funds for many low-in­come stu­dent loan borrowers typ­i­cally come through a fed­eral anti-poverty pro­gram known as the Earned In­come Tax Credit . The In­ter­nal Rev­enue Ser­vice de­fines the pro­gram as a fi­nan­cial boost for fam­i­lies with low or mod­er­ate in­comes.

Nearly 27 mil­lion tax­pay­ers col­lec­tively re­ceived more than $65 bil­lion through the pro­gram in 2017, ac­cord­ing to the IRS. Work­ers who earned $53,930 or less in 2017 and meet other qual­i­fi­ca­tions may be el­i­gi­ble for an EITC pay­ment when they file their fed­eral tax re­turns this year.

Cre­ated dur­ing the 1970s, the pro­gram was ex­panded by Pres­i­dent Rea­gan. A his­tory of the pro­gram and its ef­fec­tive­ness by the Eco­nomic Pol­icy In­sti­tute, a non-par­ti­san Wash­ing­ton, D.C., think tank, said the EITC has drawn crit­i­cism in re­cent years be­cause it elim­i­nates fed­eral in­come tax li­a­bil­ity for many low-in­come work­ers.

How­ever, the Na­tional Con­sumer Law Cen­ter re­port cited re­search that showed the pro­gram in­creased em­ploy- ment among sin­gle mothers and low­ered re­liance on gov­ern­ment wel­fare pro­grams.

By seiz­ing EITC re­fund checks from stu­dent loan borrowers in dis­tress, the fed­eral gov­ern­ment of­ten makes it “harder to ac­cess work, sta­ble and safe hous­ing, and to pay for ba­sic ne­ces­si­ties,” the re­port said.

Chil­dren are of­ten the main vic­tims be­cause the largest re­fund checks typ­i­cally go to fam­i­lies with chil­dren, the re­port added.

That sounds like McKnight, an EITC re­cip­i­ent, and her fam­ily.

She says her stu­dent loans piled up be­tween 2009 and 2013 while she stud­ied for an as­so­ciate de­gree at Ul­ster County Com­mu­nity Col­lege in New York’s Hud­son Val­ley.

McKnight also says she was out of work from 2013 through 2016 while car- ing for her daugh­ter, Jas­mine, who has spe­cial health needs and can­not be left in day care pro­grams. New bills came in for ul­tra­sound tests and other health care costs re­lated to her son Kay­den’s birth last year, she says.

McKnight had hoped to pay off some of the bills with her re­fund. Though she hopes that a po­ten­tial new job as a school bus mon­i­tor will ease her fi­nan­cial strain, she says the loss of the tax re­fund rep­re­sents a ma­jor fi­nan­cial blow. “It was the worst pos­si­ble time for this to hap­pen,” she says.



Low-in­come stu­dent loan borrowers typ­i­cally take ad­van­tage of the Earned In­come Tax Credit.

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