In early 2020, Mary Perez was expecting $6,516 in tax refunds to help with her bills. Perez was relying on the money to cover basic necessities for herself and her two children.
But in February 2020, just weeks before the world and economy shut down due to COVID, the funds were taken by the government to repay student loans she had previously defaulted on.
“I was expecting for that money to take care of my family,” she said recently. Shortly after the funds were taken, she lost her job working in food service due to the pandemic-era restrictions. Perez, 50, resorted to extreme measures to ensure her family stayed fed and housed.
“I did something that I could have never done, asked for my children’s father to help me out with them,” she said. “I had to go to some people looking for help for food.” Perez, who lives in Brooklyn, N.Y., added that she was also in touch with food pantries to try and find sustenance. “That situation was really bad for me,” she recalled.
Now, more than three years later, Perez got her money back. The government returned the funds as part of a settlement of a lawsuit she and other borrowers filed alleging the feds withheld the information they needed to get out of default as required by law. Still, the delay in receiving the funds took a toll.
“It was something that I was expecting before,” Perez said of her tax refund. Once Perez received the funds, she used it to repay the friends and family she’d borrowed money from to cover basic necessities after her refund check was seized.
Settlement results in change to the government’s process
For the plaintiffs in the lawsuit like Perez, the settlement is in many ways a win. It also resulted in a change in the government’s process for collecting on defaulted student loans that could prevent other borrowers from having their tax refunds or Social Security checks taken to repay defaulted student loans.
Still, the yearslong delay between when the plaintiffs were expecting to receive their tax refunds and when they ultimately got the money back posed challenges that highlight how devastating the government’s approach to student debt collection can be amid the $1.7 trillion student-debt crisis.
“Two people have actually been homeless and one had to leave the city and is basically struggling” said Johnson M. Tyler, an attorney at Legal Services NYC representing Perez and the other borrowers. Out of nine original plaintiffs in the case, who all lived in New York when the case was filed, “that’s a third of the people have had problems with their housing,” in the aftermath of having their tax refund or Social Security benefits garnished.
“It goes to show just how vulnerable everyone is who faced forced collection,” Tyler said.
The government won’t be garnishing tax refunds, Social Security checks or seizing workers’ wages to collect on defaulted student loans until at least 2025 as part of an on-ramp to help borrowers adjust to the return of student-loan payments following a more than three year pandemic-era pause. Still, advocates are pushing the Department of Education to re-think its approach to collecting on defaulted student loans, which even some officials have acknowledged can be unnecessarily punitive.
Perez and her co-plaintiffs relied on their tax refunds and Social Security checks to survive. The crux of their lawsuit was the funds were needlessly taken because there is a relatively seamless way for borrowers to get out of default and avoid its consequences, but notices the government and its contractors sent to borrowers didn’t provide clear information on that path to relief.
In settling the suit, the government didn’t admit any wrongdoing. But the government did overhaul the notices borrowers at risk of having their tax refunds or Social Security checks receive. The agency didn’t provide additional comment on the suit and the notices by press time.
The original notices didn’t tell borrowers they would be eligible to get out of default through consolidation. That process can be completed relatively swiftly and moves borrowers directly into an income-driven repayment plan where they can stay current on their loans for as little as $0 a month.
Instead, the old notices focused on rehabilitation, a route borrowers can use to get out of default, but can be difficult for borrowers to complete successfully. Rehabilitation requires borrowers to make nine on-time payments in 10 months. In addition, when borrowers exit rehabilitation they need to apply to get on an affordable repayment plan with their new servicer, a process during which borrowers can fall through the cracks and wind up back in default.
The original notices used legal jargon that prevented many borrowers from understanding their tax refunds or Social Security were at risk of being taken, Tyler said.
New notice minimizes jargon
The government’s new notice minimizes legal jargon and warns borrowers that “you may lose money from your government payments,” including, “federal and state tax refunds and up to 15% of your Social Security Disability and Retirement Benefits.”
In addition, the notice informs borrowers that they can stop collections through consolidation. It also provides borrowers with detailed information about ways they can apply to have their loan discharged, for example if they have a disability that’s so severe they can no longer work.
“It provides people context for what their routes are,” to get out of default and avoid collection activity, Tyler said of the new notices. “For most people the big goal is to avoid losing money, so they’ll take advantage of the quicker route now.”
“The other notices really were discouraging any meaningful understanding of what your rights were,” he added.
We won’t know for at least several months whether the new notices are preventing borrowers from having their Social Security funds or tax refunds taken. That’s because the government paused collection activity on defaulted student debt for a year following the end of the pandemic-era payment pause.
“A better notice isn’t the best thing in the world, because people lose them, people don’t understand them, but at least it creates a level playing field with the collector,” Tyler said. “The collector, or the servicer, is now accountable to what is in the notice.”
Meanwhile, Saibou Sidibe, one of the plaintiffs in the case, is happy to have his $2,698 back. When the government seized his tax refund in 2019, it derailed plans to attend a family reunion in North Carolina with his wife and children. The family also had to apply for a credit card to pay for basic expenses.
Sidibe, who says the $84,503 he borrowed to attend a for-profit college didn’t improve his career prospects, said he felt guilty that his education had put his family’s financial security at risk. “It was very hard for us to deal with,” he said of losing the tax refund. “It was a painful time.”
Sidibe said he was relieved to learn he’d be getting his money back. He plans to use the funds to buy basics for his two children, like clothes, and to pay for two beds he bought for them on credit when they outgrew their beds.
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