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Student loan borrowers sue Betsy DeVos and Steven Mnuchin over seized tax refunds

This story has been updated to reflect comments from the Education Department.

Consumer advocates are suing Education Secretary Betsy DeVos and Treasury Secretary Steven Mnuchin for their departments’ failure to stop seizing student loan borrowers’ tax refunds to pay for their defaulted loans, despite declaring that it would stop doing so on March 25.

The class action suit was filed by nonprofit organizations Student Defense and Democracy Forward against the Department of Treasury, the Department of Education (ED), Steven Mnuchin, and Betsy DeVos on May 29 in the U.S. District Court for the District of Columbia.

The group alleges that despite millions of Americans losing their jobs amid the pandemic, the Treasury seized more than $18 million in tax refunds from over 11,000 borrowers in April 2020.

“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,” Alice Yao, senior counsel at Student Defense, said in a statement. “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.”

She added: “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.”

In response to the lawsuit, ED Press Secretary Angela Morabito said that as of May 28, it has returned more than $2.2 billion in offsets to more than one million borrowers.

And following the national emergency declaration on March 13, “the Department proactively worked with Treasury to pause all offsets in process on March 20,” she stated. “On March 25, 2020, Education Secretary Betsy DeVos announced her directive to stop all wage garnishments and collections actions, as well as refund offsets already in process to more than 800,000 borrowers.”

Education Secretary Betsy DeVos speaks to the crowd gathered during the Conservative Political Action Conference (CPAC) annual meeting on Thursday, February 27, 2020. (PHOTO: Toni L. Sandys/The Washington Post via Getty Images)

Colorado family had tax refund seized, still not returned

This is the latest in a series of lawsuits filed against DeVos — as well as credit reporting agencies — for misinterpretations or mistakes over the implementation of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 

In this particular case, the issue arises over defaulted student loans.

Keri Cole had attended Heritage College in Lakeside, Colorado from 2007 to 2009, and she got her associate’s degree. She was planning to be an X-ray technician and a medical assistant. She took out over $23,000 in student loans to finance that education. She and her husband have a family of four.

The Arvada, Colorado-based family’s sole source of income was her husband’s custom woodworking business, which generated about $50,000 a year. But the business took a major hit amid the COVID-19 pandemic and “produced almost no income for six to eight weeks earlier this year,” the lawsuit states.

The family filed taxes on March 27. In April, their federal tax refund was seized. The Coles had been expecting $6,859, but on April 8 she received a notice that said that the entire sum was “offset to pay Ms. Cole’s defaulted student loans, in violation of the CARES Act,” the lawsuit argued. “As a result, Ms. Cole and her family are behind on their rent and bills.” 

The money hasn’t been refunded to her. 

When a student loan borrower defaults on their federally issued or guaranteed student loans, a pre-existing agreement between Congress, ED, and the Treasury gave authority to ED to “offset” those debts by seizing individuals’ federal and/or state tax refunds. 

On March 25, ED announced that it would be not only stopping this process temporarily to help borrowers amid the spread of the coronavirus, it also said it would be issuing refunds to tax refunds withheld on March 13, 2020, when the national emergency was declared.

Members of President Trump's cabinet, including Education Secretary Betsy DeVos (2nd L) and Treasury Secretary Steve Mnuchin (2nd R) on February 28, 2017. (PHOTO: by Win McNamee/Getty Images)

Multiple lawsuits over CARES Act implementation

The issue of implementation has been at the heart of the lawsuits filed by student loan borrowers in recent weeks.

Earlier this month, one of the groups that is involved in today’s lawsuit, Student Defense had also sued ED and DeVos for allegedly continuing to garnish wages of around 54,000 federal student loan borrowers, also in violation of the CARES Act.

In that case, ED stated that it had taken immediate action to stop garnishing wages, but it was having trouble reaching employers to get them to stop.

In a separate case, Nelnet-owned Great Lakes, along with Equifax, TransUnion, Experian, and agencies owned by VantageScore Solutions were sued for inaccurately reporting information about student loan payments and affecting millions of borrowers’ credit scores.

In that case, Nelnet said it was working quickly to resolve the issue — it was reporting payments as deferred, instead of on-time, which resulted in the credit impact — and the office of Federal Student Aid’s COO Mark Brown tweeted that it was also looking closely into the issue.

But the pandemic shouldn’t be a reason why the CARES Act hasn’t been followed, advocates argued.

“The turmoil caused by the ongoing pandemic is no excuse for breaking the law,” Democracy Forward Senior Counsel Jeffrey Dubner said in a statement. “Our class-action suit seeks to hold the administration accountable so that student borrowers can stay on their feet during this crisis.”

Aarthi is a reporter for Yahoo Finance covering student debt and higher education. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami

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