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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12 Responses to “Grandma’s Social Security check increasingly at risk from unpaid student loans”

  1. I think it’s time to reintroduce age-discrimination for loans. It should be acceptable (maybe even standard policy) to require that loans be set up to be paid off by 65, given that it’s reasonable to expect a substantial decrease in income at that point. It’s not just student loans, either. During the aftermath of the housing bubble, we saw many improbable situations featuring very elderly people getting 30-year mortgages.

    There are a lot of objections. What about reverse mortgages? What about people with substantial resources who use loans as part of some sort of complicated financial plan? To the first question, I’d say just that reverse mortgages are a notoriously scammy financial product. To the second, I’d say that the number of people who are genuinely clever with loans is far exceeded by the number who believe that they are clever with loans.

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  2. In the case of student loans, government intervention basically does away with any basic type of underwriting that would normally prevent that older person from taking on a student loan.

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  3. I think it’s important to know the ratio of student loan debt to income. The $14k median may sound entirely manageable, but not be so for a barista or similar. When I listen to personal finance radio, it amazes me how many people with very marginal employment (who would struggle even if they had no debt) have low five figure student loan debt.

    The doctors are the only group of major student borrowers I don’t worry about. (Although I had a cousin who went to medical school, ran up $64k in debt, and then decided she didn’t like medical school and dropped out, followed by the $64k.) I would worry very much about a newly minted lawyer with $100k in debt. (There’s a new staff blogger at getrichslowly.org who somehow ran up $100k in student loans all while getting a doctorate, but that’s a totally self-inflicted wound.)

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  4. “How do you run up 100K in debt while getting a doctorate?”

    Beats me. She’s kind of a smart airhead, if you know what I mean.

    “I remember my father (a department head at a research university) telling me that if I wasn’t awarded an assistantship, the school didn’t really want me.”

    Yep. And the awful truth is that if you’re not good enough to get funding, you’re probably also not good enough to get a decent job afterwards, so those who take on debt for graduate school are the least likely to be able to pay it off. This particular Get Rich Slowly staff writer is currently working a moderately paid college admin job ($40k, I think I remember), rather than a tenure track teaching job. Oh, and her husband has $100k in law school debt and he just quit a $90k a year big firm job to earn half as much on his own. Their situation certainly generates a lot of interested comments from the personal finance crowd, though!

    “Funny, though, how we don’t seem to worry as much about medical debt, which is one of the leading causes of bankruptcy.”

    That’s a very disputed point. As Megan McArdle pointed out,

    “In her (in)famous paper on medical bankruptcies in 2001, [Elizabeth] Warren and her co-authors defined anyone with $1000 worth of medical bills as having a medical bankruptcy, and used that figure to imply that rising medical bills were pushing people over the financial edge.”

    http://www.theatlantic.com/business/archive/2010/07/considering-elizabeth-warren-the-scholar/60211/#

    From my hours of listening to Dave Ramsey on the radio, I know that hospitals are actually very eager to make deals for reduced payment with patient debtors, as they know that half a loaf (a settlement) is better than none (a bankruptcy). The patient has the hospital over a barrel. In many cases, if they can lay hands on a few thousand dollars, they can make the hospital debt go away completely. (Not that this isn’t a huge problem for the hospital and society at large.)

    It’s actually truer to say that inability to work due to medical issues causes a lot of bankruptcies. If somebody’s income is suddenly cut in half or cut to zero and they don’t have substantial emergency savings, they will suddenly be unable to pay their full mortgage, car payments, credit cards, not to mention immediate needs like food, gas, utilities, etc.

    “This tends to encourage doctors to go into specialties where they can make a lot more money, even though we really need more GPs and fewer dermatologists.”

    I wonder how much this varies regionally. We so need more dermatologists in our good-sized city. I forget the exact details, but we only have three dermatologists in town and I think I remember that two of them have cash-only practices and the other isn’t taking new patients. I may not have the details right on the situation, but the bottom line is that you have to go an hour away to actually see a dermatologist on insurance. The local GPs have to handle a lot of stuff that would normally be done by dermatologists. Oh, and this is Texas, so dermatology is actually very important for basic health.

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  5. Some years back (2006), I helped with the paperwork asking for the forgiveness of a $10k medical bill for a young woman who was briefly hospitalized with life-threatening ketoacidosis. There was a lot of paper and documentation involved to demonstrate her inability to pay as well as her substantial ongoing medical expenses, but the hospital (Georgetown in DC) forgave the whole bill.

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  6. It surprised me the last time I tried to make an appt. with my dermatologist and there was a three month wait.

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  7. “Collection agencies do not negotiate.”

    Everybody negotiates, especially collection agencies. There is nothing particularly scary about a collection agency, aside from the fact that they hire nasty people and sometimes engage in illegal harassment. The collection agencies are nearly all bark, no bite. Aside from nonbankruptable stuff like student loans, there’s no unsecured debt that can’t be cut down to size, particularly if it’s an old debt. The older debt gets, the happier the creditor is to deal, and the less they’ll take for settlement in full. This does have consequences for debtor credit rating and history, but there are lots of ways to deal with large debt short of actual bankruptcy. (An additional issue is that debt-buyers themselves purchase bad debt from creditors for a tiny fraction of the face value, so those debt-buyers are (contrary to appearances) happy to take small partial payments as settlement in full.)

    I listen to a lot of hard-luck personal finance radio, so I’ve heard many stories of people with financial problems successfully dealing with collection agencies. It just takes patience, some street smarts (get the settlement in writing! give no direct electronic access to accounts!) and a little money.

    (That said, it saves a lot of trouble to go directly to hospital billing as soon as possible if payment is going to be a problem.)

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  8. As a handy rule of thumb, the more power a creditor has, the less they bother dealing with the debtor. Collection agencies have very little power, which is why they are famous for harassment–that’s all they’ve got to work with. On the other hand, if you stop paying your mortgage or car payment, you may hear barely anything from your lender right up until the foreclosure process begins or your car gets towed away.

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  9. Very interesting comments about collection agencies, all of which makes perfect sense. My latest (not that I’ve had many!) experience with collection agencies involves getting notices from them for small medical expenses – less than $10, and iirc as small as $6. This has happened if I get a bill for a lab co-pay and don’t pay for a few months, which has happened because of our household disorganization and my irrational need to check every medical bill against insurance claims*. Anyway, it’s interesting that a collection agency gets involved with such small amounts. But it’s also an example of the burdensome paperwork that certainly must add to medical costs.

    * My old rule used to be not to pay any medical bill right away because chances are the insurance company would pay it and then we’d end up double paying. This kept happening until a few years ago. Now my new rule is to pay every bill that’s under $10 (maybe $20) because it’s just not worth my time to follow up to check if it’s in error.

    I should add that I feel “lucky” when any medical bills are $10 or less.

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  10. Some years back we had an experience where we were getting mysterious phone calls asking for our friend (the one who had had ketoacidosis and had been living with us while getting diabetes treatment). They wouldn’t explain who they were or what they wanted and were probably rather stymied by my informing them that she’d gone back to Russia. Finally, I managed to get out of them that it was a medical collection and was able to go to the hospital and pay the bill (it was outpatient). What had happened was that the hospital had gotten our mailing address slightly wrong, so we never got the original bill. I suppose with medical bills there are special confidentiality issues.

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