A proposed class action claims the United States Department of Education and Secretary Betsy DeVos have continued to use federal tax refunds to offset defaulted student loans despite the suspension of the practice under the Coronavirus Aid, Relief, and Economic Security Act.
Among the relief provided by the CARES Act was the suspension of student loan obligations through September 30, 2020, including the collection of student loan debt through garnishments made to borrowers’ federal income tax returns, the lawsuit says. Despite the CARES Act’s plain directive, however, the U.S. Department of Treasury, Secretary Steven Mnuchin, the U.S. Department of Education and Secretary DeVos have continued to engage in debt collection activities against student loan borrowers during a period of significant financial distress, the complaint says.
Filed in the District of Columbia by the National Student Legal Defense Network and the Democracy Forward Foundation, the lawsuit explains that when a borrower defaults on their student loan, the Department of Education will, under typical circumstances, collect on the obligation through the fully automated and computerized Treasury Offset Program (TOP). Before submitting an individual’s student loan debt to the TOP, the Department of Education must first notify the borrower of its intent to offset their tax refund before then certifying to the Treasury that the debt is valid and legally enforceable for purposes of the offset, the case says.
A debt is considered “legally enforceable” to be collected via offset if there has been a “final agency determination that the debt, in the amount stated, is due, and there are no legal bars to collection by offset,” the case goes on. On the other side of the coin, a debt is considered not legally enforceable if it is “covered by a statute that prohibits collection of such debt by offset.”
At the time President Trump signed the CARES Act into law, the Department of Education was processing roughly $1.8 billion in student loan offsets for more than 830,000 borrowers, the case says. Around March 13, the suit adds, Secretary DeVos directed the department to return this money, noting that she expected the number of borrowers to benefit from offset suspensions to increase as servicers worked their way through a queue built up at the time of the announcement of the CARES Act.
Notwithstanding the plain language of the CARES Act, DeVos’ statements and guidance posted on the Department of Education website, the defendants have continued to subject borrowers such as the plaintiff to federal tax refund offsets, the lawsuit alleges. The complaint, citing the Department of the Treasury’s TOP “Offset Collections” data website, says the Treasury offset more than $18.8 million from federal tax refunds since April 1, 2020 for disbursement to the Department of Education, affecting more than 11,000 refunds.
As the lawsuit tells it, the defendants’ failure to stop offsetting federal income tax returns suggests the Department of Education has not notified Fiscal Service that student loans it previously certified for involuntary collections through tax offsets that had not been processed before March 27 are currently unenforceable or the departmenthasnotified Fiscal Service but the agency has nonetheless continued offsetting federal tax returns to collect student loan debts.
The case further claims the defendants have handled state tax refund offsets in a similar way.
“Here again, the Departments have not taken sufficient steps to suspend the offset of state tax refunds as required by the CARES Act,” the complaint reads.
According to the case, the CARES Act did not provide the defendants with “a grace period in which to provide this temporary six-month relief.” Rather, the CARES Act was passed with the intent of suspending involuntary student loan collections and providing other economic relief immediately, per the suit.
The plaintiff says her husband’s custom woodworking business is the sole source of her family’s income. Due to the pandemic, however, the business pulled in nearly no income for six to eight weeks, leaving the plaintiff and her family of four especially reliant on their expected federal tax refund of $6,859. The woman claims that her family’s tax refund was unlawfully offset by the defendants to pay her defaulted student loans. To date, the defendants have not returned the amounts taken from the plaintiff or proposed class members’ federal tax returns in violation of the CARES Act, the case says.
The lawsuit looks to cover borrowers of student loans issued or held by the U.S. Department of Education whose federal tax refunds have been or will be offset to pay such loans between March 27 and September 30, 2020 and whose tax refunds have not been fully returned.
ClassAction.org’s coverage of COVID-19 litigation can be found here and over on our Newswire.