Older Americans Retiring with Student Loan Debt

The U.S. Government Accountability Office (GAO) has issued a report demonstrating that an increasing number of older Americans are retiring with student loan debt. Many of these borrowers are defaulting on their federal education loans and the federal government is offsetting part of their Social Security benefits to repay the defaulted loans.

According to the report, Senior citizens age 65 and older are much less likely to have student loans. Only 3% of households age 65 and older and 1% of households age 75 and older have student loan debt, compared with 24% of younger households. Nevertheless, the number of elderly Americans with student loan debt is growing rapidly and they are much more likely to be struggling to repay their student loans. More than a quarter (27%) of federal student loan borrowers age 65-74 and more than half (54%) of federal student loan borrowers age 75 and older are in default.

These results are similar to a previous report from the Federal Reserve Bank of New York, published in Liberty Street Economics.

Student Loans Persist Even After Retirement

Student loans are not cancelled when the borrower reaches retirement age. It is almost impossible to get student loans discharged in bankruptcy. The U.S. Department of Education can offset up to 15% of Social Security disability and retirement benefits, which can affect the financial security of retired Americans. An increasing number of senior citizens are losing part of their Social Security benefits to repay defaulted federal education loans each year.

The authority to withhold Social Security benefit payments was enacted by the Debt Collection Improvement Act of 1996 (P.L. 104-134). This legislation and subsequent regulations also protected the first $750 of monthly Social Security benefits from being offset, effectively capping the amount of Social Security benefits that could be offset. The U.S. Department of Education began offsetting Social Security benefits in 2001, with the first full year of offsets occurring in 2002. A December 2005 decision by the U.S. Supreme Court upheld the U.S. Department of Education’s authority to offset Social Security benefits in Lockhart v. US (04-881). In 2013, more than 155,000 people had Social Security benefits offset to repay defaulted federal education loans, and 36,000 of them were age 65 and older.

Source of Loans Borrowed by Senior Citizens

The source of the loans held by older Americans is unclear. Of the federal education loans owed by people age 65 and older, 18% is from Federal Parent PLUS loans borrowed to pay for their children’s college education. The remaining 82% was borrowed to pay for the borrower’s own education.

Most of this debt is probably not from their student loan debt borrowed 30-40 years ago, since student loan volume was much lower then and almost all student loans are repaid within 30 years. It is more likely that the student loans were borrowed more recently. For example, older Americans may have borrowed because they returned to school to finish their education or to change careers. They may also have borrowed to pay for advanced degrees.

Most of this debt is for federal education loans, not private student loans. The private student loans may be from parents and grandparents cosigning private student loans for their children and grandchildren. Private student loans are not eligible for Social Security offset.

Rule of Thumb Concerning Reasonable Debt

Parents should borrow no more for all their children than they can afford to repay in ten years or by the time they retire, whichever comes first. If retirement is only five years away, they should borrow half as much. If total Federal Parent PLUS loan debt is less than the parents’ annual income, they should be able to repay the parent loans in ten years or less.

Tips for Borrowers Subject to Offset of Social Security Benefits

Borrowers who are having Social Security benefits offset to repay their loans may be able to get the payments reduced by rehabilitating their defaulted student loans. Rehabilitation involves making 9 out of 10 consecutive full voluntary on-time monthly payments. It may also be possible to rehabilitate defaulted student loans through consolidation. Rehabilitation clears the default and makes them eligible for alternate repayment plans, such as income-based repayment.

The monthly payment under income-based repayment is usually lower than the 15% offset of Social Security benefits, and, sometimes, much lower. The monthly payment under income-based repayment is 15% of the amount by which adjusted gross income (AGI) exceeds 150% of the poverty line. If a retired person’s only income is the average Social Security retirement benefits of $1,300 a month, the monthly loan payment under income-based repayment would be zero, because the borrower’s income is less than 150% of the poverty line. Subtracting 150% of the poverty line effectively protects about twice as much income as the $750 restriction on the offset Social Security benefits.

Problems with the Offset of Social Security Benefits

Current rules protect $750 of monthly Social Security benefit payments from offset. This threshold has remained unchanged since 1998 because it was not indexed to inflation. The federal poverty line is currently greater than this threshold, meaning that a borrower can be forced into poverty by the offset of their Social Security benefit payments. Congress should consider replacing the $750 threshold with a threshold based on 150% of the poverty line, to align the offset of Social Security benefits with income-based repayment. This will also index the threshold to the inflation rate.

More than two-thirds of the Social Security benefit payments that are offset to repay defaulted federal education loans come from disability benefits, not retirement benefits. Disabled Americans need these disability benefits because they are unable to work. They may have defaulted on their federal student loans because of the disability. Offsetting disability benefit payments is immoral and an insult to this vulnerable population.

The Student Survival Guide: The perfect tool for navigating high school & college!
Try it!