More Seniors Carry Student Loan Debt into Retirement
Americans are increasingly entering their retirement years with student loan debt. Outstanding federal student loan balances for people 65 and older have ballooned from about $2.8 billion in 2005 to $18.2 billion in 2013, according to a GAO analysis of Survey of Consumer Finances data. There are now approximately 706,000 senior citizen households that still have student loan debt.
Senior citizens are less likely to have student debt than young people. Nearly a quarter of households headed by people under age 65 -- some 22 million people -- have outstanding student loans, compared to 4 percent of households headed by someone ages 65 to 74. But borrowers 65 and older are much more likely to have defaulted on their federal student loans. Only 12 percent of people between ages 25 and 49 have federal student loans in default, compared to over a quarter (27 percent) of retirees ages 65 to 74 and more than half of loans held by seniors ages 75 or older.
Student loan debt after age 65 can significantly impact the finances of retirees. If federal student loans go unpaid for more than a year the Department of Education may take action to recover the funds. Borrowers who miss one or more student loan payments have a little over a year to resume payments or renegotiate the terms of the loan before collection procedures are initiated. Once the loan has been delinquent for 425 days the Department of Education can begin collection proceedings, perhaps including garnishing wages, sending the loan to a collection agency, charging collection costs, initiating litigation and reporting the failure to repay to credit reporting agencies. Federal payments to borrowers who have not made scheduled loan repayments can be withheld to repay the loan, including tax refunds and Social Security retirement or disability benefits.
The Department of Education sends a list of newly defaulted loans that have remained unpaid for more than 425 days to the Treasury each year in July. At that point any available tax refunds are used to repay the loan without prior notice to the debtor. Borrowers who receive federal monthly benefits are informed by mail that their benefits will be offset 60 days and 30 days before the money is reallocated to the debt. The Treasury also charges a fee of $15 per offset in fiscal year 2014.
A portion of the debtor's Social Security disability, retirement or survivor benefits can also be withheld to pay off the loan. Social Security offsets to pay student loan debt grew by 500 percent from approximately 6,000 in 2002 to 36,000 in 2013 among people age 65 and older. The Treasury collected about $24 million by withholding Social Security benefits from debtors in 2002, a number that increased to $150 million in 2013. However, the average monthly amount withheld from each retiree increased only marginally over the past decade from $120 to $130.
Federal law limits how much can be removed from Social Security checks to repay student loans. Social Security benefits paid to debtors can be withheld by as much as 15 percent of the total benefit or the amount that exceeds $750 a month, whichever is lower. For example, a debtor with a Social Security benefit of $1,000 a month would have 15 percent of his benefit, or $150, withheld because that is less than the portion of the benefit over $750, which is $250. However, the $750 limit was set in 1998, when that amount was above the poverty line for a single adult age 65 and older, and has not been adjusted to keep up with inflation.
"Because the statutory limit at which monthly benefits can be offset hasn't been updated since it was enacted in 1998, certain defaulted borrowers with offsets are left with Social Security benefits below the poverty threshold," according to the GAO report. "This creates the potential for an unpleasant surprise for some, as their benefits are offset and they face the possibility of a less secure retirement."
Seniors may continue to have student loan debt in retirement because they chose to make small payments over a longer period of time, accumulated interest and fees on late payments or went back to school late in their career. Some adults also cosign loans or take Parent PLUS loans to help their children pay for college, but the majority of outstanding loans for those ages 65 to 74 (82 percent) are for the borrower's own education costs. Most student loan debt cannot be eliminated in bankruptcy, so the loans typically stay with individuals until they pay them off, even if that means having the money withheld from retirement benefits.
Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, circle her on Google Plus or email her at firstname.lastname@example.org.