Social Security provides an important safety net for America's seniors and the disabled, but for many recipients, that safety net is being degraded by an unlikely source — unpaid student loans. A recent report from the Government Accountability Office (GAO) found that approximately 114,000 Americans have had their Social Security benefits reduced via seizure for failure to pay student loan debt.
While the maximum monthly reduction is 15% of Social Security benefits, the typical reduction is $140 per month — which can still make a huge difference in the standard of living for those affected. According to the Social Security Administration, Social Security represents just over one-third of income for the elderly and makes up 90% or more of the total income for 21% of elderly married couples and 43% of unmarried seniors. Many disabled workers are equally dependent on their Social Security income.
The reductions, known as offsets, affected almost 70,000 recipients that are at or below the federal poverty guideline. Approximately one-quarter of those recipients were dropped below the poverty line by the offset; the remainder of the 70,000 were already below the poverty level and pushed even further into poverty by the offset.
Unpaid student loan debt is particularly difficult to deal with, because it cannot usually be discharged through bankruptcy like other debts and there is no statute of limitations on the liability for federal student loans. (State laws cover the statutes of limitations on private student loans.)
Under the restrictions, what can seniors do given their limited resources? There are a few avenues of relief available.
If you are receiving disability benefits under a condition that is not expected to improve, you may qualify for a total and permanent disability (TPD) discharge of your debt. The qualification criteria and application process are available on the Federal Student Aid website. Annual verification and documentation of the condition is required to maintain the TPD waiver.
Financial burdens are not completely removed with a TPD discharge, because the amount of forgiven debt is considered to be taxable income. While debt is still decreased, the tax bill can be significant.
Another path is to apply for financial hardship with the Department of Education citing exceptional circumstances. You will need to supply financial information as well as an explanation of the exceptional circumstances. The forms required can vary depending on the type of student loan involved. Click here for details.
Other specialized methods of debt removal are available, such as public service loan forgiveness and closed school discharge. Details on debt removal types may be found on the Federal Student Aid website.
If forgiveness is not an option, you can consider loan modification to reduce the burden. Loan consolidation is available through the Department of Education, and loan terms may be modified through income-based repayment plans that can scale your monthly payment to your discretionary income. Make sure that you fully understand the tradeoffs for each of these programs — typically, you will end up paying more over the long run through increased interest charges, and other downsides may apply.
Congress is set to consider measures to stop Social Security garnishments or limit them in some fashion (reduced garnishment amounts, time limits, inflation indexing, etc.), but any such actions will take time that you may not have. If you are in this situation, see if you qualify for any of the possible forms of relief. If not, your best hope may be to seek some form of loan modification or to refinance your student loan.
Finally, remember that garnishment only occurs once your student loan goes into default. Your best course of action is to attack the debt before it reaches the default stage. Preventing a default is far easier than dealing with the aftermath, and that is especially true for seniors.
Find out quickly at what rate you can refinance your student loan.