Personal finance

Struggling student loan borrowers may miss out on big part of child tax credit

Damir Khabirov | iStock | Getty Images

The expansion of the child tax credit is aimed at lifting millions of American families out of poverty. Yet an omission in its legislative language may leave behind a group that would most benefit from it: struggling student loan borrowers.

The American Rescue Plan, the $1.9 trillion stimulus package signed into law in March, expanded the existing child tax credit, upping the payments, making them available to more people and doling out the money in monthly installments.

Under the new rules, families can get up to $3,600 a year for each child below the age of 6, and as much as $3,000 for those between 6 and 17. Beginning in July, that led to eligible households receiving up to $300 a month per child.

The full credit, however, may not reach student loan borrowers in default.

More from Personal Finance:
The October tax extension deadline is fast approaching
Americans are still struggling to save
This is the age when Americans say they plan to retire

That’s because along with their wages and Social Security checks, those who’ve fallen behind on their education loans can have their annual tax refunds seized by the U.S. government. This can cause people to also miss out on the child tax credit and the earned income tax credit, since those are usually paid out in tax refunds.

Although the relief bill made it so that the advance payments of the child tax credit — those monthly installments — can’t be seized because of an unpaid federal student loan, it failed to spell out the same for the portion of the credit that’s given out at tax time in the form of a refund.

“It’s an administrative quirk that the payment is treated differently depending on when you receive it,” said Abby Shafroth, a staff attorney at the National Consumer Law Center.

Yet what appears a minor detail could have major consequences: Approximately 9 million student loan borrowers are in default, and around half of them have a dependent child, according to an estimate by the National Consumer Law Center.

These borrowers face unfortunate timing. The U.S. Department of Education has paused its loan collection activity during the pandemic, but it’s scheduled to resume enforcement in February – just when many families start to file their taxes.

As a result, when 2021 refunds are sent out, many could lose $1,800 per child (what they’d be owed of the expanded credit after the monthly payments that began in the summer are accounted for). For households that opted out of the installments, the loss could be as high as $3,600 per child.

“This problem is particularly acute because we know that the families of borrowers in default are those that need the child tax credit payments most and for whom these funds would be most transformative,” Shafroth said.

“They’re demonstrably struggling financially, overwhelmingly low-income, and disproportionately Black and Latino.”

Advocates are pushing for the entire credit to be protected from garnishment, which they say can be done by Congress in the upcoming reconciliation bill.

Products You May Like

Articles You May Like

Roaring Kitty’s GameStop stake grows to 9 million shares after selling his big options position
Nadella, Narayen among tech CEOs investing in cricket’s American dream
Home equity is near a record high. Tapping it may be tricky due to high interest rates
Fintech has hit a bottom after plunge in valuations and squeeze on funding, execs and VCs say
Capital Cost Recovery across the OECD, 2024

Leave a Reply

Your email address will not be published. Required fields are marked *