Class Action Suit Seeks to Halt Trump Administration’s Unlawful Seizure of Federal Tax Refunds
Seizure Part of Pattern of Agency Mismanagement, Failure to Protect Borrowers
Washington, D.C. — Today, Student Defense and Democracy Forward filed a class-action lawsuit against Treasury Secretary Steven Mnuchin and Education Secretary Betsy DeVos for their departments’ illegal seizures of thousands of student borrowers’ tax refunds. The CARES Act suspended all involuntary collection of federal student loans — including through a Treasury Department program that garnishes tax refunds to pay federally-held debts — until September 30, 2020, to help families weather the economic fallout of the coronavirus pandemic. Despite the law’s immediate effect, Kori Cole, a graduate of Heritage College in Lakeside, Colorado, received a notice from the U.S. Department of Treasury Bureau of Fiscal Service in April 2020 that the entire federal tax refund owed to her and her husband — worth nearly $7,000 — was seized to pay down federal student loan debt.
The illegal actions of the Departments of Treasury and Education have taken millions of dollars out of the hands of borrowers dealing with the fallout from the coronavirus crisis. Today’s class-action lawsuit seeks an immediate halt to the illegal seizures and a return of all unlawfully seized federal tax refunds.
“In the middle of this devastating pandemic, Secretary Mnuchin and Secretary DeVos have been illegally offsetting tax refunds of student borrowers despite clear instructions from Congress and the President to stop,” said Alice Yao, Senior Counsel at Student Defense. “The Administration has shown an utter disregard for the law and the needs of student loan borrowers during this difficult time, and their botched rollout of CARES Act protections is causing real suffering for families across the nation. We are suing to make sure borrowers get the relief they are entitled to, and to hold this Administration accountable for their continued failures to implement the CARES Act.”
“Secretaries DeVos and Mnuchin have inflicted needless financial pain on student borrowers and their families by failing to stop the illegal seizures of their tax refunds,” said Democracy Forward Senior Counsel Jeffrey Dubner. “The turmoil caused by the ongoing pandemic is no excuse for breaking the law. Our class-action suit seeks to hold the administration accountable so that student borrowers can stay on their feet during this crisis.”
Lead plaintiff Kori Cole, a mother of two, trained to be an x-ray technician and is currently staying home to take care of her children. Her husband owns a custom woodworking business that provides the sole income for their family of four. But that business was hit hard by the pandemic. Sales halted for several weeks, and many jobs were put on hold. Ms. Cole and her family had counted on using their federal tax refund to pay for living expenses — but found themselves unable to pay their bills in full after the Department of Education and the Treasury Department seized their entire refund to pay down Ms. Cole’s student loan debt.
Under normal circumstances, the Department of Education has the authority to seize, or “offset,” the tax refunds of borrowers who default on their federal student loans. The Treasury Offset Program, run by the Bureau of Fiscal Service, enables the federal government to collect past-due, federally-held debts from taxpayers’ refunds. The CARES Act halted all involuntary collection of student loans as of March 27, 2020, including tax refund offsets. But in the month of April alone, the Treasury Department offset more than $18 million from over 11,000 student borrowers to pay debts owed to the Department of Education.
Borrowers’ state tax refunds can also be offset to pay debts owed to the federal government. The Treasury Department coordinates with states to allow the seizure of state tax refunds. In FY2019, 41 states and the District of Columbia had reciprocal agreements that resulted in the seizure of $493.2 million in state tax refunds to pay debts owed to the federal government. Like federal tax refunds, state tax refunds have been — and may continue to be — seized in violation of the CARES Act.
The illegal seizure of tax refunds is but one example of the administration’s failure to protect student borrowers amid the crisis. On April 30, for instance, Student Defense filed a separate suit challenging the Education Department’s failure to halt the garnishment of 54,000 borrowers’ paychecks. And a recent report revealed that nearly 5 million student loan borrowers have had a federally-contracted company report incorrect information on their credit reports since the coronavirus crisis began.
The Education and Treasury Departments’ failure to stop the illegal seizure of student borrowers’ tax refunds reflects the Trump administration’s indefensible lack of interest in protecting the more than 44 million Americans saddled with a collective $1.6 trillion in student loan debt. As usual, the Trump administration has put student loan servicers ahead of current and former students.
The class-action suit was filed on May 29, 2020 in the U.S. District Court for the District of Columbia.
Democracy Forward is a nonprofit legal organization that scrutinizes Executive Branch activity across policy areas, represents clients in litigation to challenge unlawful actions, and educates the public when the White House or federal agencies break the law.
Student Defense is a non-partisan, non-profit 501(c)(3) organization that works, through litigation and advocacy, to advance students’ rights to educational opportunity and to ensure that higher education provides a launching point for economic mobility.