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 retired people are learning that defaulting on student debt can threaten something that used to be untouchable: their Social Security benefits.
According to government data, compiled by the Treasury Department at the request of SmartMoney.com, 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 Aug. 6, the government reduced the size of 115,000 recipients' Social Security checks on those grounds. That's nearly double the pace of the department's enforcement in 2011; it's up from about 60,000 cases in all of 2007 and just six cases in 2000.
The amount that the government withholds varies widely, though it runs up to 15 percent. With an average monthly Social Security benefit for a retired worker of $1,234, that could mean a monthly reduction of almost $190.
"This is going to catch an awful lot of people off guard and wreak havoc on their financial lives," said Sheryl Garrett, a financial planner in Eureka Springs, Ark.
Many of these people 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., said 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.
Others 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 how many of the defaulting loans fall into which category.)
Most consumer advocates and attorneys who work with seniors in this predicament told SmartMoney.com that their clients were unwilling to speak on the record, because of shame or fear. But they all stress that stakes involved can become very high for older people on a budget.
Deanne Loonin, a staff attorney at the National Consumer Law Center in Boston, said she's been working with an 83-year-old veteran whose Social Security benefits have been reduced for the past five years. The client fell behind on a federal loan that he signed up for in the '90s to help with his son's tuition costs; Loonin said the government's cuts have left the client without enough cash to pay for medication for heart problems and other ailments.
2.2 million over 60
Roughly 2.2 million student loan debtors were 60 and older during the first quarter of 2012, and nearly 10 percent of their loans were 90 days or more past due, up from 6 percent 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," said Robert Applebaum, founder of Student Debt Crisis, a nonprofit advocacy group in Staten Island, N.Y.
The threat of Social Security cuts adds to the overall financial woes faced by the aging Baby Boomer generation. Almost 45 percent of people age 48 to 64 won't save enough money to cover basic needs and uninsured health care costs in retirement, according to the Employee Benefit Research Institute. Experts say reducing Social Security benefits could set them back even more.
That same generation has been slammed by the soaring cost of college, whether for their kids or themselves.
Of the more than $1 trillion in outstanding student loan debt, federal student loans account for about 85 percent, according to the Consumer Financial Protection Bureau. (Private student loans account for the rest; private lenders can garnishee a borrower's wages, but can't touch Social Security.)
Unlike other consumer debts, student loans typically can't be wiped out in bankruptcy. And changes in the law over the last couple of decades have given Uncle Sam more power to pursue defaulters, said William Brewer, president of the National Association of Consumer Bankruptcy Attorneys.
Attorneys who specialize in defending debtors have seen a sea change as the government has stepped up its enforcement. For most of the past four years, Joshua Cohen, an attorney in Rocky Hill, Conn., has represented clients in their dealings with banks and collection agencies. It was only in the past year, Cohen said, that he started getting a growing number of calls from retirees. Now, Cohen said, "I'm getting calls from all over the country from people desperate for help."
More debt for young
Compared with present-day retirees, younger generations are in deeper debt, which means stories of Social Security garnisheement could become more common when they retire. 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: 66 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," said Rich Williams, higher education advocate at the U.S. Public Interest Research Group, a nonprofit consumer group.