EITC refund withheld in student loan default
Jared Bernstein writes about the EITC today (Earned Income Tax Credit), which is a program to help lift people out of poverty when they fall into low-paying jobs.
I just want to add another wrinkle to the story. When a student defaults on their student loans, which is something that will happen more and more in the future, it’s the same as personal loans for poor credit – any tax refund they might receive, including an EITC refund, will be kept by the IRS. The money will then be used to pay back the lender of that student loan.
EITC will not work for students running into a poor jobs market. Wages are low. GDP has a lower equilibrium level. Unemployment will stay higher than in the past. And students are now leading the household credit increases with new student loans, along with car buyers.
At a time when students are increasing their debt and the economy is much less favorable to pay off those debts in the future, EITC will not be there for them.
There is no reason to default on student loans. Forbearance is forever and can be applied yearly with the first three years interest free (economic hardship). After 20-25 years (not sure which) of forbearance the gov can forgive debt. I am assuming there are some students who would be in low income status that long. I suspect defaut is caused by a lack of knowledge.
Not only can the gov attach EITC, they can do so with Social Security also.