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IRS Confiscates Tax Refunds to Cover Defaulted Loans

Times Staff Writer

More than 248,000 Americans who had been waiting this spring for federal tax refund checks instead received notes saying that their money had been confiscated to pay off unpaid federal loans.

Federal officials said Wednesday that this first experiment with using the Internal Revenue Service to collect outstanding debts has proven to be “an overwhelming success,” not only for the money it has brought in but for the message it has sent.

“In this vast sea of federal programs, some people might have thought that if I don’t pay, nobody will care. Well, we care,” said Education Secretary William J. Bennett, whose department has collected by far the most money from loan defaulters.

$116 Million Recovered

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Since January, education officials have gotten back $116 million from 217,000 former college students who failed to pay off federally backed loans. Bennett said that another 30,000 student defaulters, after receiving a note threatening to withhold their tax refunds, voluntarily paid back $16.5 million.

“Our success is good news for all those young Americans who, sometime in the future, will find that they too wish to seek (a federal student loan),” Bennett said, because the money goes back into a revolving fund for student aid. “This collection is also something of a vindication for those 9 out of 10 students . . . who do repay their loans on time, in full.”

Loan defaulters from four other smaller federal programs, including veterans who received education aid and poor people who got mobile-home-improvement loans, also had their refunds withheld this year.

248,000 Refunds Tapped

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James C. Miller III, director of the Office of Management and Budget, said that the IRS in total tapped 248,000 income refunds through May and withheld $135 million.

“Our message is that, if you owe a debt to the taxpayers of America, you can run but you can’t hide,” said Miller, who joined Bennett to talk about what he called “a bona fide government success story.”

But the officials conceded that the new IRS program has recovered only a tiny part of the staggering $24 billion in outstanding debts owed to the federal government.

‘Will Chip Away’

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“The problem has not disappeared this year. We will chip away at it,” Miller said, noting that federal officials plan to extend the collection effort to four other federal programs next year. The largest chunk of debt--about $9 billion--is owed to the Agriculture Department by bankrupt farmers, money that officials said they are unlikely to recover.

In the case of the Education Department, former students defaulted on $1.3 billion in loans last year. And, despite the stereotype of the doctor or lawyer who walked away from his student loans, officials say that the majority of defaulters have low incomes and get no tax refunds.

“In general, the students who drop out in their first semester are the most likely to default on their loans. Those who stick it out and get a degree are the least likely to default,” said Ronald Kimberly, assistant secretary for post-secondary education.

Focus Not on Poor

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Using the IRS to confiscate tax refunds “allows us to focus on those who are not poor,” Kimberly added.

On Tuesday, the Senate approved a $9.6-billion-a-year extension of the Higher Education Act but added a tough new provision to garnish the wages of federal employees who have defaulted on student loans.

The measure, offered by Sen. Phil Gramm (R-Tex.), was approved without dissent, but it is not contained in a parallel House bill.

Education officials have sought to recover defaulted loans from their own employees, but if the measure becomes law, “it will the first time it has been tried governmentwide,” said Ellin Nolan, a staff member on the Senate Labor and Human Resources education subcommittee.

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