Behind on student loan payments? Part of your child tax credit may be seized

Millions of parents who’ve defaulted on their federal student loans may get part of their child tax credit seized this tax season.

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.

But such an outcome with respect to the child tax credit seems to 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, according to consumer advocates.

“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] will be lost for families suffering from unaffordable student loans.”

A spokesperson for the U.S. Department of the Treasury referred a request for comment to the U.S. Department of Education. An Education Department spokesman didn’t return a request for comment by press time.

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 road block 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.

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.

Tax season began Jan. 24 and ends April 18 for most people.

Borrowers in default may 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.”  

However, there is one thing working in borrowers’ favor: There is still a federal pause on student-loan repayments, interest and collections through May 1.

That policy, instituted during the pandemic era, means that borrowers’ tax refunds are safe if the IRS issues the refund before that date. The federal government can’t then claw back that refund, Shafroth said.

“If someone receives their refund before May 1, they should be fine,” Shafroth said. “They can go out and buy groceries and pay rent without worrying it’ll be recalled from them.”

This means student borrowers who are in default may want to file their taxes as soon as possible to beat that deadline, Shafroth said.

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.

Most taxpayers who file a return electronically, elect to get a refund via direct deposit and file an accurate return (something especially relevant for those who got a monthly child tax credit or a stimulus check in 2021) shouldn’t experience delays, the IRS said.

Married borrowers who file a joint tax return may be able to get some relief by taking an additional step: filing IRS Form 8379, Shafroth said. If just one spouse is legally liable for a student loan debt, the other spouse can file this “injured spouse” form to try to protect a prorated portion of their tax refund, she said.