Student Loan Borrowers Sue the Federal Government

Student loan borrowers have been having a difficult time recently. Even though laws have given them some relief from loan payment obligations for the time being, every day seems to bring a fresh assault on this seemingly beleaguered class. First, student loan borrowers saw their credit scores slashed due to a "coding error" after their payments were postponed. Now, some of these borrowers who were delinquent in their obligations have seen their tax refunds seized by the federal government. Some borrowers have filed lawsuits against Education Secretary Betsy DeVos and Treasury Secretary Steve Mnuchin for taking tax refunds in violation of the provisions of the CARES Act.
 

The Federal Government Can Take Your Tax Refund

The normal federal law is that government payments to you can be set off against debts that you owe to the federal government. For this reason, the government generally does have the ability to take your tax refund away from you when you owe money for other things. The government does not even need to hold a court hearing to do this. They can take your tax refund automatically, and all they need to do is give you notice. The government can even take your tax refund if you fall behind on child support payments or to offset the money that you owe to the federal government. This is a very broad right, and there is little that someone can do to appeal when the government takes your tax refund short of filing a lawsuit against the government. This is difficult and expensive to accomplish.

The CARES Act provided several items of relief for student loan borrowers. The foremost help that Congress gave was suspending payment obligations until September 30, 2020. This means that no payments are due during this time and no interest accrues. However, despite the fact that the CARES Act mandated that borrowers could not be penalized for not paying student loans during this time, the nation's largest student loan servicer coded the accounts in a way that caused their credit scores to drop by roughly 30 points. This has sparked class-action lawsuits against the loan services and credit bureaus.

Now, plaintiffs are claiming that the federal government itself violated the CARES Act by seizing tax refunds from plaintiffs after the date when the CARES Act purportedly stopped these seizures. The CARES Act explicitly stated that seizures of tax refunds for student loan defaults would stop while the student loan relief was in effect. In fact, the Department of Education had announced two days before the bill was signed into law that it would stop these offsets. In addition, if borrowers experienced seizures because they were already in process on March 13, the Department of Education would issue a refund.
 

The Department of Education Still Took the Plaintiff's Tax Refund

However, the plaintiff in the case claims that the Department of Education did exactly what the law presently forbids. She and her husband's tax refund of almost $7,000 was seized. The plaintiffs have made requests to get their money back. However, as of the date of the filing of the lawsuit, they have not received a refund. According to their complaint, her husband makes less than $50,000 per year and needed the tax refund to stay afloat financially.

The lawsuit claims that the problem of these illegal offsets goes beyond the plaintiffs and reach other borrowers as well. They cite the fact that the Department of Treasury's own publicly released data shows that the Department of Education is continuing to initiate offsets during this time. They show evidence of a public website that says that the Department of Education has offset almost $19 million of refunds spread over a total of 11,049 refunds. This would seemingly show that the Department of Education continues to take tax refunds away in spite of what the CARES Act says.

Regardless of whether the breakdown is something that is unintentional or not, seizing tax refunds could be considered a violation of the law. Of course, when plaintiffs sue the government, they generally cannot receive monetary damages from the federal government. People will generally sue the government seeking a declaration that the government's actions are illegal and for the return of certain property. This is exactly what the plaintiffs are seeking here. The lawsuit asks the court to declare that the Departments of Education and Treasury comply with the provisions of the CARES Act.