Behind on your student loan? This could reduce your child tax credit


Two tax credits offered to most families with children are at risk of being “clawed back” by people who owe the government money, despite the tax credits’ goal of helping children in need. Child rights advocates are now calling on policy makers to ensure that major sources of financial support reach where they are most needed.

More than 100 organizations have signed a letter to U.S. Treasury Secretary Janet Yellen asking her to prohibit the Treasury Department from seizing refunds related to the Earned Income Tax Credit and Child Tax Credit from low-income families who have taken late in repaying their student loans or other debts.

The practice “undermines the social safety net and threatens to push millions of children into poverty,” the letter says.

“The expansion of the (child tax credit) this year has cut child poverty nearly in half and reduced family food insufficiency by 26% since July 2021. This year’s fully refundable credit has been particularly effective in reaching the 27 million children (half of them Black, Latino and Rural Children) who previously lost all credit because their parents’ income was too low,” the groups wrote. “But because of the Treasury’s practice of offsetting tax refunds to collect public debt, millions of low-income families risk missing out on these essential lifelines.”

In the short term, a policy change may not be necessary.

Collection of student loans has already been suspended until after May 1, prompting fears that once this pause is over, tax refunds will be suspended. But the Department of Education said it plans to suspend compensation for six months after that until Nov. 1, protecting the 2022 tax season refund, according to a post on the Federal Student Aid website.

New Jersey News Organization quoted the Treasury Department as saying that only Congress can exempt the child tax credit from offsets. Child advocacy groups remain concerned about the policy and its potential impact on children.

For the second half of 2021, Congress authorized the monthly payment of an expanded child tax credit to give families immediate access to tax relief to help them through the pandemic.

Congress has also protected these advance payments from interception, a practice called “compensation” because it offsets a portion of what is owed. But Congress has not shielded those who receive part or all of the tax credit as a tax-time refund from being set off from the fund.

Tax refunds and Social Security partial payments are among the funds that can be seized by the federal government to help pay outstanding debts like federal student loans and child support owed through the Treasury compensation program.

But advocates say the money should never be taken from tax credits designed to help the most financially vulnerable, including children.

“These offsets hurt families who are already in obvious financial difficulty and unable to pay their bills and deprive low-income children of essential resources,” the letter said.

In a press release on the letter, Maryann Broxton, a member of the Center for Law and Social Policy’s community partnership group, said advocates have fought for years to obtain and protect the two tax credits, which benefit to income-eligible households that include children.

“People rely on them for essential necessities,” she said. “A new washing machine, a car repair, even glasses or dental work.”

Most people who default on student loans have long been economically and socially vulnerable, said Sameer Gadkaree, president of the Institute for College Access & Success. He noted that “default penalties push them deeper into financial instability, so the practice of taking their repayments only hurts them more, rather than helping them.”

An estimated 9 million people have defaulted on federal student loans and are at least nine months behind on payments. Yet Education Secretary Miguel Cardona tweeted earlier this month that “the child tax credit should be available regardless of your student loan repayment status.”

Other high profile groups that signed the letter to Yellen include the Children’s Defense Fund, First Focus on Children, the Center for Taxpayer Rights and the Coalition on Human Needs, among others.

The letter also asks Yellen to work with Congress and the administration to protect the money families receive from the Child Tax Credit and Earned Income Credit and to provide data so the public and policymakers can “better understand the scale of this problem”, including the number of people affected and how much they have lost due to offsets.


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