- Student loan debt is a growing problem among seniors.
- If you are behind or have defaulted on your student loan repayments, the federal government can garnish up to 15% of your Social Security benefits.
- You can try to negotiate a repayment plan, or qualify for loan forgiveness if a disability keeps you from working.
Student loan debt is a big problem for anyone who has it—especially if they can’t pay it back. The problem doesn’t just hit Millennials. Much of the more than $1 trillion in student loan debt nationwide is held by Gen X-ers and Baby Boomers, parents and grandparents.
If you are retired and responsible for a federal student loan that goes into default, your Social Security benefits can be garnished to help repay that debt. Here is how that could happen and what you can do about it.
The Scope of the Problem
In two words: Not small. From 2005 to 2015 the number of people age 60 and older with student loan debt quadrupled to nearly 2.8 million, according to the Consumer Financial Protection Bureau (CFPB). A TransUnion study for The Wall Street Journal found that student loan borrowers in their 60s owed an average of $33,800 in 2017, up 44% from 2010. Total student loan debt rose 161% for people aged 60 and older from 2010 to 2017.
Almost 40% of people over age 65 with student loan debt are in default. As a result, the federal government (the nation’s largest student loan lender) garnished the Social Security benefits, tax refunds or other federal payments of more than 40,000 people aged 65 and older in the fiscal year 2015. Currently, about 114,000 Social Security recipients overall are having benefits garnished due to a defaulted student loan. Of that number, 67,300 are living below the poverty line. And they can’t count on outliving the problem: No statute of limitations exists on student loan debt.
How Social Security Garnishment Works
When an agency decides to garnish your Social Security benefits, it is restricted to taking no more than 15% of your monthly total. Moreover, your benefits cannot be reduced below $750 per month or $9,000 per year.
While you cannot appeal, challenge, question or change the amount of the debt, you can go to the agency that put the garnishment on and seek relief—for example, by requesting a payment plan because of the hardship you face from this action.
How We Got Here
Many older people in default on student loans took those loans out late in life to further their education in advance of a career change. They might have been seeking a better-paying line of work or trying to acquire new skills due to the loss of their old jobs. Unfortunately, unemployment for older people often results in their holding lower-wage jobs, making loan payback even tougher.
But perhaps the main reason for so much senior student loan debt is that older generations took it upon themselves to finance college for children and grandchildren. It wasn’t just out of love or generosity. After the Great Recession of 2008, many lenders tightened their standards, requiring parents to co-sign their kids’ loans. Some private lenders directly pitched the loans to parents, dangling the prospect of better terms or lower interest rates if they, rather than their offspring, were the borrower, presumably because they had more assets.
As for federal loans, the government limits the dollar amount of that undergraduates can borrow for college—but doesn’t impose any caps on the aggregate amount of debt that parents can assume. The Department of Education disbursed $12.7 billion in such “Parent Plus” loans during the 2017-18 academic year, up from $7.7 billion 10 years earlier, and from $3.3 billon in 1999-2000.
What You Can Do
It’s always better to attack the problem before the loan goes into default. For most federal student loans, failing to make a payment for 270 days will result in default. The government will sometimes agree to an income-based repayment plan, with payments as low as $1, but be aware that this can increase the size of your debt. All the same, choosing this option may make it possible for you to both pay back your loans and save for retirement, too.
The government will also forgive all or part of a defaulted loan if you are disabled or have a long-term medical condition, either physical or mental, that makes it impossible for you to be gainfully employed. Keep in mind that the cancellation of a student loan results in taxable income in the year it was written off. Still, the end result could still be cheaper than having to pay back the entire debt.
Be careful of services that market themselves aggressively as debt consolidation or counseling services. Some are shady; carefully research any you’re considering. Click the Consumer Protection Bureau offers guidelines on getting help; the Federal Trade Commission re has advice on choosing a credit counselor, too.
Possible Government Fixes
The garnishment terms have never been adjusted to reflect increases in the cost of living. As originally set, the dollar threshold that you had to be left with, $9,000 a year, was at the national poverty level. Now it is below it. As a result, many experts say either percentage or the dollar limit needs to be changed.
The Department of Education has also been encouraged to provide a clearer process for discharging debt for people with disabilities. According to the U.S. Government Accountability Office (GAO), the documentation rules “are not clearly and prominently stated.” In fact, in May 2019, a group of nine New York City borrowers whose Social Security disability benefits were garnished due to past-due student loans got nearly $23,000 worth of payments restored to them, after a three-year court battle.
The Department of Education has also agreed to improve its notification techniques, using the latest address it has on file for the borrower to send letters warning them that garnishment is impending.
Bankruptcy: A Last Resort
Absent relief from the federal government or your ability to withstand garnishment, the main solution left is bankruptcy (though it’s generally more difficult to wipe out student debt with bankruptcy than it is to absolve other kinds of debt). If you’re like most people, you consider this a sign of personal failure.
You should know, however, that it is legal to reorganize your debts. If it gets to this point, you should consult a tax professional to make sure everything is done properly and you know all the consequences of taking this action.