In general, the federal government provides student loans to qualified Americans regardless of their credit history. To facilitate repayment and avoid borrower default, it offers numerous programs, including income-based repayment schemes and, for now, loan forgiveness for public service. Naturally, once a borrower defaults, the government enjoys an extraordinary range of powers for securing payment. Among the tools utilized by the Internal Revenue Service for this purpose, one stands out: the ability to garnish a borrower’s wages, Social Security check, and tax refund, which can include the earned income tax credit benefit (“EITC”) without the entry of a court order. Unlike Social Security income, however, the IRS can seize 100% of a borrower’s EITC.
Designed as a benefit for working people with low to moderate income, the EITC originated in 1975. It has been expanded by tax legislation in 1986, 1990, 1993, 2001, and 2009, regardless of whether the act in general raised taxes (1990, 1993), lowered taxes (2001), or eliminated other deductions and credits (1986), and most income measures, including the poverty rate, do not adjust for a recipient’s EITC. In spite of these expansions, in a random survey of 568 members of the American Economic Association in 2011, roughly 60% of economists agreed (31.7%) or agreed with provisos (30.8%) that the Earned Income Tax Credit program should be expanded. Underscoring this credit’s popularity, the District of Columbia and twenty-five states (including Colorado, Connecticut, Delaware, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, Vermont, Virginia, and Wisconsin) enacted their own EITCs by the end of 2012.
Although there is no official tally on how many borrowers lose their EITC each year due to a student loan, the number may be in the millions. A 2009 report from the National Taxpayer Advocate, an internal IRS watchdog, found that more than 1.3 million 2008 tax returns claiming the EITC were subject to collection for unpaid debts. During fiscal year 2015, the federal government actually seized $2.3 billion from borrowers to repay defaulted student loans; 91% of that total (or $2.1 billion) came from federal tax refunds. So far, Congress has expressed little interest in circumscribing this particular IRS power.