Defaults on Student Loans are Reducing Social Security Benefits ... Who'd a Thunk it?

Just when things seem to be as crazy as they can get, they get a little crazier. At least that's my take on the following story concerning student loan defaults and the resulting reduction in Social Security benefits for many retirees.

Grandma's New Financial Problem: College Debt is subtitled 'Tens of thousands of retirees have fallen behind on student loans -- and the feds are coming after their Social Security benefits:'

"It's no secret that falling behind on student loan payments can squash a borrower's hopes of building savings, buying a home or even finding work. Now, thousands of retirees are learning that defaulting on student-debt can threaten something that used to be untouchable: their Social Security benefits.

 

 According to government data, . . .  the federal government is withholding money from a rapidly growing number of Social Security recipients who have fallen behind on federal student loans. From January through August 6, the government reduced the size of roughly 115,000 retirees' Social Security checks on those grounds. That's nearly double the pace of the department's enforcement in 2011; it's up from around 60,000 cases in all of 2007 and just 6 cases in 2000.

The amount that the government withholds varies widely, though it runs up to 15%. Assuming the average monthly Social Security benefit for a retired worker of $1,234, that could mean a monthly haircut of almost $190. "This is going to catch an awful lot of people off guard and wreak havoc on their financial lives," says Sheryl Garrett, a financial planner in Eureka Springs, Ark.

Many of these retirees aren't even in hock for their own educations. Consumer advocates say that in the majority of the cases they've seen, the borrowers went into debt later in life to help defray education costs for their children or other dependents. Harold Grodberg, an elder law attorney in Bayonne, N.J., says he's worked with at least six clients in the past two years whose problems started with loans they signed up for to help pay for their grandchildren's tuition. Other attorneys say they're working with older borrowers who had signed up for the federal PLUS loan -- a loan for parents of undergraduates -- to cover tuition costs. Other retirees took out federal loans when they returned to college in midlife, and a few are carrying debt from their own undergraduate or graduate-school years. (No statistics track exactly how many of the defaulting loans fall into which category.)
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Roughly 2.2 million student-loan debtors were 60 and older during the first quarter of 2012, and nearly 10% of their loans were 90 days or more past due, up from 6% during the first quarter of 2005, according to the Federal Reserve Bank of New York. "It's really a unique problem we haven't had to face before, and it's only going to grow," says Robert Applebaum, founder of Student Debt Crisis, a nonprofit advocacy group in Staten Island, N.Y. . . . .

Student-loan experts say that changes in payment plans are partly to blame for why an aging population is still dealing with college loans. The repayment period on federal student loans can be extended to 30 years, Kantrowitz notes, if borrowers owe $60,000 or more. Another eight years can be added on for borrowers facing unemployment or other economic hardship; during those years, payments aren't required but interest accrues.

Compared to present-day retirees, younger generations are in deeper debt, which means stories of Social Security garnishment could become more commonplace when they enter retirement. Borrowers in their 20s and 30s owe roughly $600 billion, according to the New York Fed. They're also leaving college with more debt than their predecessors: Sixty-six percent graduated this spring with debt, and their student loans averaging $28,720, up from $9,320 in 1993, according to FinAid.org. "It's entirely possible that the way student loan debt is growing, this could get worse," says Rich Williams, higher education advocate at the U.S. Public Interest Research Group, a nonprofit consumer group."

Summing Up

This student loan issue will continue to get worse until it reaches the crisis stage.

Reducing interest rates, as the government just did, won't even begin to address the real issue -- the affordability of college and the people who attend college, take out loans, drop out of college and then can't repay those loans.

We need to stop building such nice buildings and start using our taxpayer money wisely.

Allowing students to receive subsidies directly and spend on the college of their choice, private or public, would be a step in the right direction.

Our current practice of subsidizing the institution directly so it can raise tuition charges, among other things, and then loaning students the money to attend that institution is an accident waiting to happen, as more and more Social Security recipients are now discovering.

Thanks. Bob.