Archive for August 10th, 2012

August 10, 2012

Grandma’s Social Security check increasingly at risk from unpaid student loans

by Grace

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 retirees are learning that defaulting on student-debt can threaten something that used to be untouchable: their Social Security benefits.

… From January through August 6, the government reduced the size of roughly 115,000 retirees’ Social Security checks on those grounds. That’s nearly double the pace of the department’s enforcement in 2011; it’s up from around 60,000 cases in all of 2007 and just 6 cases in 2000.

The amount that the government withholds varies widely, though it runs up to 15%. Assuming the average monthly Social Security benefit for a retired worker of $1,234, that could mean a monthly haircut of almost $190. “This is going to catch an awful lot of people off guard and wreak havoc on their financial lives,” says Sheryl Garrett, a financial planner in Eureka Springs, Ark.

Most of these loans in default were for children or grandchildren.

Many of these retirees 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….

A “unique” new problem

Roughly 2.2 million student-loan debtors were 60 and older during the first quarter of 2012, and nearly 10% of their loans were 90 days or more past due, up from 6% 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,” says Robert Applebaum, founder of Student Debt Crisis, a nonprofit advocacy group in Staten Island, N.Y.

Student debt obligations are piling on to the existing problem of inadequate retirement savings.

The threat of Social Security cuts adds to the overall financial woes faced by the aging baby boomer generation. Almost 45% of people aged 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.

You can extend your student loan payment period up to 38 years – longer than most mortgages.

Student-loan experts say that changes in payment plans are partly to blame for why an aging population is still dealing with college loans. The repayment period on federal student loans can be extended to 30 years, Kantrowitz notes, if borrowers owe $60,000 or more. Another eight years can be added on for borrowers facing unemployment or other economic hardship; during those years, payments aren’t required but interest accrues.

The trend is not good.

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. 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: Sixty-six 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,” says Rich Williams, higher education advocate at the U.S. Public Interest Research Group, a nonprofit consumer group.

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