When Creditors Can Garnish Retirement for Delinquent Student Loans and What to Do About It
The issue of high student loan debt among Millenials is well documented and reaches the stage of politicians and activists. However, borrowers nearing or in retirement are also finding student loan payments to be problematic. More than $150 million dollars was garnished from social security wages in 2013 to pay back delinquent student loans held by seniors. Debt incurred to pay for a child’s schooling, as well as their own education, accounts for the growing percentage of student loans among seniors, to the tune of $60 billion dollars to borrowers over 50. The trouble is that senior default rates are much higher than other age groups and reached over 50% for borrowers over the age of 75. Seniors between 65 and 74 have a 27% default rate compared to the average default for Millenials at only 12%. Unfortunately, these numbers have an upward trend, which can leave seniors depending on social security, without enough funds to pay for basic needs.
One of the big challenges with student loans is that there are few relief options on the debt. It is very difficult to receive a bankruptcy discharge, and it is one of the few debts the Government will garnish Social Security wages to collect. For seniors depending on Social Security to keep them out of poverty, this is a devastating blow.
Help with Repayment for Federal Student Loans
- The first payment is due nine months after leaving school, giving former students the opportunity to find a job or better-paying employment before repayment starts.
- Deferrals and forbearances are available for those struggling with temporary shortages in income.
These two benefits offer temporary relief to the borrower. However, they are not a long-term solution to the student loan problem seniors face. They extend payments and lead to higher amounts owed in repayment, increasing the risk of wage garnishments. It also leads to more interest payments and a higher cost for the education received.
Power to Garnish Social Security
Because most student loans are offered through the government, they have the right to garnish wages on defaulted loans. Creditors typically do not have access to Social Security for garnishments. However, when it comes to student loans, the Department of Education can take up to 15% of the Social Security payment or amounts over $750, leaving seniors with less to live on in retirement. Congress has not updated the threshold in two decades to adjust for inflation. Such an adjustment would protect up to $1,000 a month in social security wages. The Department of Education does not require a court order from a judge to obtain a garnishment, leading to faster or more frequent deductions.
Individuals 65 and older hold 18 billion dollars in student loan debt, and a wage garnishment can drastically reduce the quality of life among our most vulnerable citizens.
If You Are at Risk, What Should You Do?
When you struggle to make payments or have gotten behind, the first step is to contact the servicing company. Currently, only a small percentage of borrowers use the income-based repayment options. While it results in more payments over a longer period, if it prevents a garnishment, it will improve cash flow.
Alternative repayment options may include the following:
Forgiveness: In some cases, student loans can receive a discharge through bankruptcy. There is a provision for seniors unable to pay when their anticipated financial situation is not likely to improve. The judge considered the date of the loan disbursement, the age of the borrower, and other considerations will determine whether a judge will approve a discharge. It is not common even for seniors living on Social Security as their only income.
Disability requires full and permanent disability as determined by the Social Security Administration, to qualify for discharge.
Repayment Plans that are Income Based: Payments can extend to 20 or 25 years, lowering the monthly payment. At the end of that time, any remaining balance will qualify for discharge. Such action may mean carrying loans to the grave but will preserve your Social Security payments. It is possible to have a $0 payment and still count towards the required years. To qualify for an income-based program, you must reapply each year and submit tax returns to determine the payments for the next 12 months. The payment compares your gross income to the poverty level in your state of residence and also considers the size of your household to determine a monthly payment.
Loan Consolidation: If you are in default on your student loans, you may still qualify for a consolidation to combine interest and payments. You may only consolidate one time. Consolidation offers the benefit if a single payment to simplify the repayment process.
Public Service Forgiveness. Working for a public service company for ten years results in the discharge of any remaining balance. Service does not require consecutive years and may be a way to eliminate student loans faster. Public service includes educational jobs, state or federal employment, and other public service positions. Some non-profit work also qualifies under this program.
Personal student loans secured by the Federal Government, issued by the Department of Education qualify for these options. In some cases, Parent Plus loans qualify as well.
The servicing company will help you provide a workable solution to protect your income, including Social Security wages from garnishments. In some cases, they can offer a forbearance to reset the clock on the debt, and help with the application for consolidation or an income-based repayment option. It is more difficult to bring a defaulted loan current, to stop any existing garnishments, making it important to get help early in the process.