Personal finance

Education Department Says It Won't Seize Child Tax Credit for Past-Due Student Loans

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  • There are about 9 million federal student loan borrowers whose loans are in default. Roughly half are parents with dependent children, who are eligible for the child tax credit.
  • Monthly installments of the credit paid from July through December were protected from garnishment for federal debts. That's not true for the rest of the credit paid as a refund this tax season.
  • The federal student loan pause protects those refunds issued before May 1. An Education Department official said it won't seize the tax credit past that date, either.

The Education Department will not seize the tax refunds parents get from the enhanced child tax credit in order to satisfy past-due student loan payments, according to an agency spokesperson.

Consumer advocates had been worried millions of borrowers who've defaulted on their federal student loans would get part of the credit seized this tax season. A federal pause on student loans protects borrowers' tax refunds issued before May 1, but those received afterward aren't legally protected.

The Education Department official said the agency won't withhold refunds attributable to the child tax credit for borrowers in default. The agency clarified its position after CNBC published a story Tuesday morning about the issue, for which the bureau did not initially offer a comment.

"The continued pause on student loan payments has helped protect Child Tax Credits for millions of borrowers, including those in default," the official, who spoke on condition of background, wrote in an e-mailed statement. "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."

The federal government has long been able to collect past-due debts, like child support, owed to state and federal agencies. This occurs via the Treasury Offset Program, which lets the government withhold Social Security checks, tax refunds and other payments to satisfy debts.

Such an outcome would be at loggerheads with the poverty-fighting policy goal of the American Rescue Plan Act, which temporarily enhanced the credit's value and made it available to more low-earning parents in 2021, advocates said.

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

Loans in default

A borrower is generally in default if they fall at least 270 days behind on federal student loan payments. (Terms may vary by loan type.)

There are roughly 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 issued by the Institute for College Access and Success.

Low-income students, Black students and those earning a four-year degree from a for-profit college are more likely to default on their student loans than other groups, according to the Institute.

The American Rescue Plan, which President Joe Biden signed into law in March, boosted the maximum value of the child tax credit to $3,000 per child under age 18, with a $600 bonus for kids under 6 years old.

It also broadened eligibility for the credit by eliminating an earned-income requirement that presented a roadblock for the poor. It also turned the tax credit (which is typically issued as a one-time refund during tax season) into a monthly income stream.

Seizing the credit

Parents got half the total value of their 2021 tax credit in monthly payments from July through December spread in increments of up to $250 or $300 a month per child.

Those monthly payments were safe from seizure by the federal government, due to specific language in the American Rescue Plan.

But that same exemption doesn't apply to the remaining half, which parents get after filing their income-tax returns. Parents who chose to opt out of the monthly payments may get their whole tax credit seized as a result.

Borrowers in default could be on the hook for the entire unpaid balance of their federal loan — not just the past-due portion — due to a mechanism called "acceleration."  

Tax season began Jan. 24 and ends April 18 for most people. The IRS is already warning of potential delays relative to processing tax returns and refunds this year, due to ongoing pandemic-related challenges. The agency had yet to process 6 million individual tax returns as of Dec. 31, from prior tax years.

(This story has been updated to reflect comments from the Education Department.)

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