Tax Refund Got You Excited? Don't Count On it If Your Student Loans Are in Default

"Jamie McKnight, 35, a mother of two, filed her federal tax return in late January, expecting to get a roughly $9,700 refund that would help her pay for rent, health care expenses and other bills," USA Today reports. "What the Kingston, N.Y., resident didn't anticipate was that nothing would show up in her bank account."

"McKnight soon discovered that the government had seized the money to apply to her overdue student loans, which she said total roughly $20,000. She says she didn't know the loans were in default, or that the feds could repay the debt with her refund.

'I waited for it to hit my account, and nothing happened,' she said. 'It's frustrating because this was supposed to be our safety net.'

As millions of Americans marked the nation's one-day-extended April 18 tax-filing deadline with plans to spend or save refunds from Uncle Sam, thousands of student loan borrowers like McKnight weren't sharing the dreams. The federal government has already taken away their refunds and applied them to the overdue debts.

Full data showing how many student loan borrowers will be affected during the 2018 fiscal year isn't yet available. However, a USA TODAY review shows that the U.S. Department of the Treasury during the 2017 federal fiscal year collected nearly $2.6 billion owed on defaulted federal student loans.

The total represents the highest ever in terms of dollar collections, according to Treasury's Bureau of the Fiscal Service.

The collections, representing more than 1.3 million defaulted federal student loans, also increased by $200 million from the 2016 federal fiscal year. Collections for federal student loan debts have risen steadily as the Department of Education's debt portfolio increases, according to the Treasury bureau.

Formally known as tax refund offsets, the government seizures have taken place even as total U.S. student loan debt has ballooned to an estimated all-time high of $1.4 trillion. Nearly $5.8 billion in direct federal student loans entered first-time defaults from July through September last year, the highest quarterly total since at least 2015, government records show. 

Few dispute that student loan borrowers should be held responsible for repaying the debts. However, many borrowers fell behind on their loans, and later defaulted, as the nation's 2008 financial crisis eliminated jobs, cut salaries and hobbled the economy. Despite better financial times, many borrowers have struggled to recover. 

The National Consumer Law Center, a non-profit organization focused on economic security for low-income and other disadvantaged people, contended in a March report that government seizures of federal tax refunds often trap struggling student loan borrowers in poverty.

The Department of Education said it is required by law to refer delinquent or defaulted student loan debts to the Treasury bureau, which 'offsets (withholds) the payment, in whole or in part, to satisfy the debt to the extent legally allowed.'"

NASFAA's "Headlines" section highlights media coverage of financial aid to help members stay up to date with the latest news. Inclusion in Today's News does not imply endorsement of the material or guarantee the accuracy of information presented.


Publication Date: 4/19/2018

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