Can Child Tax Credit Be Seized for Past Due Student Loans?

When you are past due on your student loans, the federal government typically garnishes wages, tax refunds and other benefits. However, due to the coronavirus pandemic, many of these collection activities are on hold temporarily. With the tax filing deadline around the corner, many borrowers wonder if the child tax credit can be seized for past-due student loans.

What is the child tax credit?

The child tax credit is an annual credit for taxpaying parents with qualifying children. It serves to assist parents with the costs of raising a child by lowering the federal taxes owed on income.

Normally, the child tax credit is $2,000 per year for each qualifying dependent. However, the child tax credit expanded to a maximum of $3,600 as part of the American Rescue Plan. As part of this change, taxpayers received a monthly stipend toward this credit from July to December 2021 instead of having to wait until they filed their taxes.

Student loan payments paused

When the coronavirus pandemic began in 2020, the federal government paused student loan payments and collection efforts to assist Americans suffering from the economic effects of the virus. In December 2021, the U.S. Department of Education extended the student loan payment pause through May 1, 2022. During these pauses, eligible student loans received a suspension of loan payments, a 0% interest rate and a stoppage of collections on loans in default.

Starting in May 2022, borrowers need to begin making payments again. Additionally, their interest rates will revert back to their normal rates. And the federal government may begin collections on loans in default starting in November 2022.

When are student loans considered in default?

The definition of default depends on whether the student loans are federal education loans or private student loans. Federal student loans are in default after 270 days of nonpayment. Private student loans are in default after 120 days.

If you are not yet in default on your student loans, consider asking for a deferment or forbearance before you default. There are many options available to help borrowers who struggle with their student loan payments. However, once you are in default, your options are limited.

Can the child tax credit be seized for past-due student loans?

Child tax credit payments

The federal government began sending out advance child tax credit payments to eligible families in July 2021. These payments were up to $300 per month for children under the age of 6 and up to $250 per month for children under 18. These monthly payments provided up to $1,800 per child in the second half of 2021.

Eligible families are also set to receive an additional child tax credit of up to $1,800 for children under 6 and up to $1,500 per child under the age of 18 on their 2021 tax return.

Advance child tax credits vs. tax refunds

According to government statistics, approximately 9 million Americans are in default on their federal student loans. Normally, tax refunds are subject to seizure by the U.S. Treasury to repay student loans in default, even when the refund is entirely from the earned income tax credit or the child tax credit. 

The American Rescue Plan specifically says that advance child tax credit payments are not subject to seizure to repay defaulted student loans. However, the American Rescue Plan does not include language that protects tax refunds from seizure to repay student loans in default.

Latest update from the Department of Education

Tax returns are due April 18, and it can take the IRS weeks, or even months, to process returns. With the pause on student loan payments slated to expire on May 1, 2022, and collections set to begin Nov. 1, 2022, many student loan borrowers could be at risk.

Although the American Rescue Plan did not protect tax refunds from seizure to cover student loan defaults, the Department of Education announced in February 2022 that it will not seize tax refunds from parents who receive the enhanced child tax credit.

With this latest guidance from the Department of Education, taxpayers who are in default on their student loans won't have to worry about losing their refunds, even if they receive their refund later this year.

How to get your loans out of default

With student loan interest capped at 0% and no payments required through May 1, 2022, this is a good time to make progress on your delinquent payments. Every payment you make between now and May 1, 2022, serves to reduce your delinquent balance due.

There are three main ways to get your student loans out of default:

• Pay the defaulted loan balance in full
• Loan rehabilitation
• Loan consolidation

Paying off the student loan balance in full is not a realistic option for most borrowers, especially those who are in default. That's why the best options to consider are loan rehabilitation and loan consolidation.

Loan rehabilitation

Loan rehabilitation requires borrowers to apply for rehabilitation with their current lender. If approved, you must agree to a temporary repayment schedule to rehabilitate your defaulted student loan. During this time, you'll make nine affordable monthly payments. Each payment must be made within 20 days of the due date during a period of 10 consecutive months. The payments cannot be more than 15% of your annual discretionary income divided by 12.

If you cannot reasonably make these payments, you can ask your lender to calculate an alternative monthly payment based on your monthly income after subtracting your monthly expenses.

Once you make all nine payments on time, your student loans are no longer in default.

Loan consolidation

A quicker path to bring your student loans current is to consolidate your federal student loans. Loan consolidation pays off an existing student loan with funds from a new loan.

To be approved for loan consolidation, you must agree to repay the loan balance under an income-driven repayment plan or make three consecutive, on-time payments before you can consolidate it.

Refinance your student loans

Another option is to refinance your federal student loans with a private student loan. Juno provides a free platform where private lenders compete to refinance your student loans. You'll get the lowest private student loan rates with no cost, no commitment and no hard credit inquiry. Once you submit your information, you'll see rates in less than 10 minutes after a soft credit check that won't affect your credit score.

The bottom line

Being in default on your student loans can be a stressful situation. If you're struggling financially, you may be worried about losing your tax refund. The American Rescue Plan protected advance child tax credits that were mailed to eligible parents in 2021. The Education Department said that refunds will not be seized to pay defaulted student loan balances. While there are some protections in place, you should consider rehabilitating, consolidating or refinancing your student loans now. That will help get your loans out of default and you on the path to financial success.