Consumer Advocates Warn: U.S. Treasury Can Seize EITC from Student Borrowers

By Devin Simpson

A new report from the National Consumer Law Center (NCLC) examines the U.S. Treasury practice of seizing Earned Income Tax Credit (EITC) payments and other tax refunds from filers who have defaulted on their student loans, and calls the consequences “devastating.”

Through a process known as “offsetting,” the government can legally intercept tax refunds from borrowers in crisis to pay back loan defaults. According to the National Taxpayer Advocate, in 2008 the government offset more than 1.3 million tax returns that claimed the EITC. Many borrowers do not receive advance notice that their refund will be taken and are unable to prepare for the setback.

The unexpected loss of the EITC can exacerbate financial instability for low-wage taxpayers, many of whom use the credit to pay for basic necessities and keep up with bills. NCLC’s report shares stories from student loan borrowers who had their EITC seized, including a single father of two who had planned to use the EITC for car repairs to get to and from work, and a U.S. Army veteran who worried his family would no longer be able to keep their home without their tax refund.

According to the Center on Budget and Policy Priorities, the EITC lifts more than six million people out of poverty each year and is proven to encourage work. As Persis Yu, the director of the Student Loan Borrower Assistance Project at NCLC, told Marketwatch, “It’s a program designed to lift people out of poverty and it’s actually a really effective tool to do that. If you want people to repay their loans, it seems like you would want them working and not in poverty.”

Borrowers who are experiencing “extreme financial hardship” can attempt to protect their EITC by appealing to the Department of Education, but these appeals are rarely successful, according to NCLC.  Instead, the Center argues that Congress should exempt student borrowers’ EITC payments from seizure and, in the interim, reimburse EITC payments seized from low-income borrowers in past years.

To read the full NCLC report, click here.