Sending your kids to college is not what it used to be. Simply put, paying for that college education is becoming a major expense.
Costs for college are soaring, whether parents are paying for their kids or for themselves. Tuition and fees have almost tripled in the last 20 years, growing faster than wages. Federal student loans account for about 85 percent of the current $1 trillion in outstanding student-loan debt. With interest, the amount keeps growing.
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-loan debt can threaten something that used to be untouchable: their Social Security benefits.
A recent report by SmartMoney.com revealed that according to government data compiled by the Treasury Department, 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 roughly 115,000 retirees’ Social Security checks on those grounds. The amount that the government withholds varies widely, though it runs up to 15 percent. Assuming the average monthly Social Security benefit for a retired worker of $1,234, that could mean a monthly cut of almost $190.
Many of these retirees are not even in hock for their own educations. The majority of the cases are borrowers who went into debt later in life to help defray education costs for their children or other dependents. Some are getting into trouble signing up to help pay for their grandchildren’s tuition. Other older borrowers have signed up for the federal PLUS loan — a loan for parents of undergraduates — to cover tuition costs. There are still other retirees that 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.
The stakes involved can become very high for older people on a budget. Unlike other consumer debts, student loans typically cannot be wiped out in bankruptcy. The Debt Collection Improvement Act of 1996 empowered the federal government to offset Social Security payments of defaulted student-loan borrowers, while an earlier law removed time limits on the government’s ability to collect from the defaulters.
The Department of Education, which provides federal student loans to borrowers, tries to work out payment plans with people who fall behind on their loans. Accounts are not sent off to collections until almost two years of non-payment. If collection does not yield results, the loan balance goes to the Treasury Department, which can reduce Social Security checks. It is when people are not making any attempt whatsoever to pay that benefits are at risk.
At that point, the Treasury Department reaches out to borrowers twice to set up a payment plan or otherwise resolve their debt before offsetting money from their Social Security check. In addition, the Treasury will not withhold money from monthly checks that total $750 or less.
College loan borrowers in their 20s and 30s are leaving college with more debt than their predecessors. 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.