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Trump administration withheld nearly $19 million in tax refunds from student loan borrowers after Congress ordered halt, lawsuit says

Treasury Secretary Steven Mnuchin is being sued alongside Education Secretary Betsy DeVos for continuing to seize the tax refunds of student loan borrowers, despite a federal order halting the practice amid the pandemic. (Olivier Douliery/AFP via Getty Images)
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Despite a federal order halting the seizure of tax refunds for past-due student loans during the pandemic, the Treasury Department has withheld nearly $19 million from 11,049 borrowers since the beginning of April, according to a class-action lawsuit filed Friday.

The lawsuit against Treasury Secretary Steven Mnuchin and Education Secretary Betsy DeVos accuses the pair of flouting the Trump administration’s own 60-day moratorium on tax offsets, which Congress codified in the stimulus package and extended through Sept. 30. It is the latest in a series of mishaps in the administration’s handling of federal relief for borrowers amid the public health and economic crisis.

Just last week, an Education Department contractor admitted to incorrectly reporting the suspended student loan payments of millions of borrowers to credit bureaus, resulting in lower credit scores for some. The week before that, the department revealed that 54,000 people were still having their wages garnished to recoup student debt in violation of another federal order stemming from the pandemic.

Borrowers sue Education Secretary Betsy DeVos for garnishing wages after Congress ordered halt

While the Education Department has said these incidents are innocent mistakes or the result of antiquated systems that are beyond their control, consumer advocates see an administration bungling critical support for Americans facing a stark economic reality.

“Congress recognized how damaging it would be to let student loan debt take precedence over people’s needs,” Jeffrey Dubner, an attorney at Democracy Forward, an advocacy group representing borrowers alongside the National Student Legal Defense Network, said on a call with reporters Friday. “And now the Trump administration’s failure to implement the Cares Act is putting thousands of people at risk.”

The lawsuit, filed in the U.S. District Court for the District of Columbia, demands that the department immediately stop intercepting borrower’s refunds and return any illegally seized funds.

Kori Cole, the lead plaintiff in the class-action lawsuit, was counting on a $6,859 federal tax refund to keep her family of four afloat. Her husband’s custom woodworking business in Colorado, the family’s sole source of income, dried up as the novel coronavirus put the economy at a standstill.

Education Department to halt collection of defaulted student loans, refund $1.8 billion

Cole filed her taxes March 27, the very day President Trump signed the relief bill into law and the same week in which the administration pledged to stop tax offsets and return money that was in the process of being seized. Yet two weeks later, Cole learned her entire refund was taken to pay down $23,000 in debt she amassed more than a decade ago studying to be a medical assistant at Heritage College in Colorado.

She said no one notified her about the moratorium, even though Congress directed the Education Department to do so no later than April 11. Cole has yet to receive her refund.

The Education Department declined to discuss the pending litigation, while Treasury did not respond to requests for comment.

There are more than 9 million Americans who have not made a payment on their federal student loans in nearly a year — defaults that place them at risk of having a portion of their paycheck, Social Security or disability income garnished or their tax refund withheld by the federal government.

Typically, the Education Department makes a referral under the Treasury Offset Program to recover defaulted debt owed to the agency. Toward the end of March, DeVos said the department had suspended referrals and would return an estimated $1.8 billion to 830,000 borrowers whose wages or refunds were in the process of being seized on or after March 13 — when Trump declared a national emergency.

A few weeks after the announcement, the Education Department said it created an automated process to expedite refund requests. Because of the system the federal government normally uses, it can take several weeks to reverse an offset.

To date, the department says that more than 1 million people have been refunded about $2.2 billion in seized income and tax refunds but offered no explanation as to why thousands are still waiting. The agency said it’s possible that borrowers have federal loans owned by private companies, which are excluded from the moratorium.

However, Cole has the type of federal student loan that is covered by the congressional reprieve. Her attorneys suspect that either the Education Department failed to notify Treasury to cease collection, or Treasury failed to take action.

Alice Yao, an attorney at the National Student Legal Defense Network, said several frustrated borrowers contacted the legal aid group after their refunds were intercepted. Attorneys combed Treasury’s website for further information and learned that thousands of people were in the same boat.