Can Student Loan Debt Eat Up Your Social Security Benefits?

 January 25, 2021
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Note that the government has paused all repayment on federally held student loans through the end of 2022, with no interest to be charged during that period and no loans to be held delinquent or in default.

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While Social Security benefits are supposed to support you after retirement, some student loan borrowers have lost that crucial lifeline. If you default on federal student loans, the government can offset your Social Security benefits as a form of repayment.

You won’t lose your benefits completely, however; there are limits to how much can be garnished for student loans.

If you’ve defaulted on your student loan debt, there are things you should know about student loans and Social Security benefits, as well as how to deal with problems like garnishment. To get a handle on this, let’s answer the following questions:

Can student loan debt threaten your Social Security payments?

Yes — and the government may not wait until you’re nearing retirement age to recoup the debt. If you default on federal student loans, the government can take extreme measures to get your money. For example:

  • The government can tell your employer to withhold your pay
  • The IRS can seize your federal tax refund and put it toward unpaid loans
  • Depending on your circumstances and type of loan, you may also have your state tax refund held as well.
  • If you’re nearing retirement, the government can also garnish your Social Security benefits.

This last consequence — Social Security garnishment — has been affecting more and more borrowers over the years.

Many retired Americans rely entirely on Social Security benefits to fund their retirement. With garnished benefits, they may not have enough money each month to live.

The good news? There is a limit to how much can be garnished for student loans. But for retirees depending on Social Security income, garnishment could make them financially vulnerable.

What’s the Social Security garnishment limit?

With the Debt Collection Improvement Act of 1996, the government allowed for garnishment of Social Security benefits but set a limit on how much can be offset. Per the act, the government can’t take any more than 15% of your Social Security payments, nor can it leave you with less than $750 in monthly benefits.

This limit doesn’t give people enough protection, though. The last time the limit was adjusted was in 1998; the cost of living has increased since then, and the poverty line has gone up.

Today, the poverty threshold for a one-person household for someone aged 65 and older is an annual income of $12,261, or about $1,022 a month. However, the government can whittle your Social Security benefits down to $750 a month, which comes out to an annual income of just $9,000. With these reduced Social Security payments, older Americans with no other revenue streams have to subsist off an income that’s well below the national poverty line.

Another piece of bad news: Most of the money carved from Social Security payments doesn’t even pay down the loan principal. Of the $1.1 billion garnished from benefits as of 2016, more than 70% had gone to paying off fees and interest, rather than the borrower’s actual debt.

How many Americans had their Social Security payments garnished?

According to data from the Government Accountability Office, around 114,000 borrowers aged 50 and above had their Social Security payments garnished in 2015. The population of people aged 50 to 64 in this situation increased by 407% from 2002 to 2015, and it increased 540% for those aged 65 and older.

Wage garnishments are on the rise, too. According to a Student Loan Hero study based on Department of Education data, wage garnishment is becoming increasingly common for student loan defaulters. In the period between July 2015 and September 2018 — the three-year period reviewed in the study — debt collectors took $2.3 billion in wage garnishments.

What can people do to save their Social Security payments?

When it comes to defaulting on student loans, people need to know their rights. For instance, older Americans on permanent disability may be eligible for a full discharge of their student loans. Borrowers with a long term medical condition may also qualify for full Social Security payments.

Depending on your circumstances, you may also be able to discuss your concerns with a free or low-cost financial counselor, who may be able to offer customized options based on your circumstances.

What can you do to avoid student loan default?

Federal loans never go away, and the government has wide-reaching powers to collect. When you fail to make a student loan payment for 270 days, your loan is considered to be in default. To get out of default, you need to catch up on payments.

You may need to enter a rehabilitation program with the Department of Education. With a rehab program, you should be able to set up an income-based plan with manageable payments. Once you’ve made several on-time payments, you may qualify to consolidate your student loans.

Student loan consolidation can simplify your monthly payments while potentially saving you money on fees. Consolidating your loans is also another way to get them out of default.

Student loans and Social Security payments: Bottom line

As 2021 began, Americans owed $1.64 trillion in student loan debt. Of those 45 million Americans with outstanding student loan debt, some are heading into retirement and hoping to rely on Social Security benefits to live.

To protect yourself, you should do everything you can now to avoid student loan default. The choices you make today could affect you for years to come. If your financial situation feels impossible, it may make sense to explore the option to discharge your student loans through bankruptcy.

Whatever your age and situation, there are options to help you manage your student loans and get out from under the shadow of debt.