Earned Income Credit Seized to Pay Student Loans

After her earned income credit was seized to pay her student loans, a mentally and physically disabled mother of two became disheartened and stopped applying for it.  The US Bankruptcy Court in the Northern District of Ohio, Western Division, ruled that her failure to apply for the earned income credit constituted bad faith, and used this as a basis to deny her a hardship discharge.  Mei’cha Dyer-White v. United States Department of Education (2007 Bankr. Lexis 2886), decided August 27, 2007, is a shocking exercise of judicial callousness.
 
Dyer-White is married, and has two children aged two and five.  Her husband’s employment history is spotty and he had been unemployed for eighteen months at the time the family filed for bankruptcy.  Her disabilities, for which she has been receiving SSI benefits since turning eighteen, included dyslexia, learning disabilities, and depression, and physical restrictions including limitations on overhead lifting. She did not graduate from high school, but eventually obtained a GED.  In 1996 and 1997 she borrowed $11,897.22 to attend the University of Toledo, a public institution, but was unable to pass most of her classes, despite being diligent in the attempt.  She works part time, on an irregular schedule, as a “helper” at Daimler-Chrysler. 

The vague description of the debtor’s employment in the case notes suggest that this is a position created specifically for handicapped individuals.  Her two children also receive SSI benefits.  According to the bankruptcy schedules, the total family income for this family of four, including food stamps, was $1580/month, and total expenses, when adjusted for the fact that they were no longer making mortgage payments since their home had been foreclosed, and didn’t need much of a clothing budget since most of their clothing was provided by charity, was $1821. The Dyer-White’s annual income of 18,960 is 29% of the Ohio median for a family of four.

So how did the court conclude that Dyer-White could afford to make student loan payments from a discretionary income of minus $241?  In 2001, a year in which she and her husband both had employment income, they filed for and received $3,195.15 in earned income credit.  The earned income credit is only available to families with children and was designed specifically to encourage people to get off the welfare rolls.  The entire amount of her earned income credit was attached and applied to Mei’cha’s delinquent student loans, leaving the family in worse shape than they would have been had neither parent been working, since their welfare benefits were adjusted downward to reflect employment income and the earned income credit was intended to supply the deficit in the family budget.  Is it any wonder the parents lost interest in working and subsequently failed to file income tax returns?

As things are now, this undischarged student loan, incurred, most probably, when well-meaning social workers encouraged education as a tool to escape a cycle of poverty and dependence, has become a powerful tool for keeping a family in a cycle of poverty and dependence by siphoning off any advantage to be gained from obtaining employment.  Is this an isolated example? Probably not, considering that the maximum amount of Pell grants, the main source of outright subsidies to very low income students, does not cover tuition and fees at most public colleges.  Moreover, even with diligent effort on the student’s part coupled with conscientious advising, some of those students will fail their studies, and others will obtain credentials which convey no advantage in the workplace.

The only winners in this scenario are the lenders, who continue to accrue interest on a government guaranteed loan which long since became unpayable.  I personally think that there are clear legal errors in this court’s application of the Brunner Test (itself of questionable validity), and grave moral errors, involving elementary compassion for the poor, in their interpretation of “undue hardship”, but even leaving aside legal and moral errors, the cost to the public purse of siphoning off poverty program money into the pockets of lenders ought to be a public issue of immediate concern.