In a classic case of unintended consequences, student loans — created to increase the economic potential of low-income students — can instead trap those students, and their children, in unending debt. Congress and the Department of Education must take steps to prevent student loans from pushing families into poverty, especially as the last COVID-era protections for student borrowers come to an end.
Leading up to the temporary pause on student loan payments and collections implemented in the wake of the COVID pandemic, more than a million people were defaulting on their federal student loans each year. Borrowers default when they can’t afford payments or successfully navigate the overly complex student loan system to access relief programs.
Most students who default are the very people the federal student aid program is meant to help by opening the door to education and economic mobility. Nearly 90 percent of borrowers who default come from low-income families, and most are the first in their families to pursue higher education.
But when that investment in education does not pay off, default often follows. Half of defaulted borrowers did not obtain a degree, often because they could not afford to stay in school, meaning they took on debt but received little to no benefit. Others finish their program but struggle to realize an associated financial boost. This is especially common among those who take out loans for shorter-term certificate programs.
When a borrower defaults, the student loans meant to unlock the door to opportunity instead plunge them into a dystopian, punitive debt collection system that is more likely to compound their hardship than help them get back on their feet. Borrowers face significant bureaucratic hurdles in attempting to resolve a default and many fortunate enough to navigate this system successfully still re-default within a few years. Nearly one million borrowers in default first defaulted over 20 years ago and are simply unable to pay down their loans, with continued efforts to collect doomed to fail while inflicting needless economic pain.
One consequence is particularly harsh: Through the Treasury Offset Program, the federal government can garnish a portion of borrowers’ wages and Social Security benefits and seize their tax refunds, including critical family resources such as the child tax credit and the earned income tax credit. By seizing these funds, the government removes financial lifelines that reduce poverty for millions of families and act as a critical safety net.
Parents have shared the devastating impacts of these seizures on their families. One widow’s seizure meant she could not make her rent, and she and her three children were evicted and made homeless. A single father had planned to use his refund to fix his car so that he could get to work. But after his refund was confiscated, he feared losing his job and that he and his kids would lose their home. A struggling veteran had been counting on his refund to keep his family car from being repossessed, so that he could drive his children to school. Another parent despaired that she wouldn’t be able to move her daughter out of an unsafe living situation.
In each case, these borrowers all have the same question: Does the government really need this money more than my kids?
Publicly available data show that the U.S. Department of Education uses Treasury Offset Program seizures extensively to collect defaulted student debt. In 2018 — before the pandemic-related pause on student loan repayment and collections — the department requested nearly one-third of all Treasury Offset Program seizures across the entire federal government ($2.9 billion out of $10.2 billion total).
However, due to data limitations, advocates have struggled to determine exactly how many borrowers are at risk of seizure. The earned income tax credit and child tax credit have had great success in lifting families out of poverty — especially those with dependent children. With this in mind, the Institute for College Access and Success (where one of us is senior director of college affordability) conducted an analysis with the Tax Policy Center at the Urban Institute, to better estimate the number of borrowers who are vulnerable to having their refunds taken.
Our analysis in a just-released report shows that a minimum of 20 percent of the 43.2 million federal student loan borrowers are vulnerable to having their earned income tax credit and/or child tax credit payments garnished. While borrowers are protected for this tax season — the final lingering pandemic-related safety net for federal student loan borrowers ends in September — the default machine will soon come roaring back to life.
Congress can stop the federal student aid program from pushing families into poverty by banning earned income tax credit, child tax credit and Social Security seizures as a method of collecting debt. Until Congress acts, the Education Department should use its authority to prevent the student aid program it administers from increasing poverty.
For example, the department could expand its current well-intentioned but poorly designed financial hardship protection so that debt collection is automatically suspended for borrowers with very low incomes, discharge defaulted loans that it is unable to collect and connect distressed borrowers to the income-driven repayment plans and loan discharge programs that can keep them out of default.
Policymakers must build on the Biden administration’s ongoing student debt relief work and protect struggling families from the poverty-compounding effects of the default system.
Abby Shafroth is the co-director of advocacy at the National Consumer Law Center and Michele Shepard Zampini is the senior director of college affordability at the Institute for College Access and Success.