Social Security Checks Are Being Reduced for Unpaid Student Debt

Social Security Checks Are Being Reduced for Unpaid Student Debt

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Josh Mitchell
The Wall Street Journal December 20, 2016

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The federal government is increasingly taking money out of Americans’ Social Security checks to recover millions in unpaid student debt, a trend set to accelerate as more baby boomers retire.

The government has collected about $1.1 billion from Social Security recipients of all ages to go toward unpaid student loans since 2001, including $171 million last year, the Government Accountability Office said Tuesday. Most affected recipients in fiscal year 2015—114,000—were age 50 or older and receiving disability benefits, with the typical borrower losing about $140 a month. About 38,000 were above age 64.

The report highlights the sharp growth in baby boomers entering retirement with student debt, most of it borrowed years ago to cover their own educations but some used to pay for their children’s schooling. Overall, about seven million Americans age 50 and older owed about $205 billion in federal student debt last year. About 1 in 3 were in default, raising the likelihood that garnishments will increase as more boomers retire.

“I believe this is the tip of the iceberg of what may be to come if we don’t work harder on this problem,” said Sen. Claire McCaskill of Missouri, the top Democrat on the Senate Special Committee on Aging.

The report showed garnishments left thousands with Social Security checks below the poverty line, prompting Sen. Elizabeth Warren (D., Mass.) to call the practice “predatory.” Both lawmakers said they will push legislation to ban it.

The government—the nation’s primary lender for college and graduate students, with a portfolio of nearly $1.3 trillion—has long had the ability to garnish Social Security retirement checks, most disability checks, and federal workers’ wages to collect unpaid student debt.

Borrowers deemed to be totally and permanently disabled—the most extreme classification—are entitled to have their student debt erased, though many aren’t aware of the option and still have checks garnished, elected officials say. Any amount erased is taxed as ordinary income.

Garnishments are designed to minimize losses to taxpayers, who ultimately cover any unpaid debt on federal loans. Federal law prohibits student-loan borrowers from expunging their debt in bankruptcy, except in rare circumstances.

Experts say those laws were designed to prevent borrowers from walking away from debt without making a good-faith effort to repay.

But consumer advocates and some congressional Democrats say the government’s tactics have become too aggressive, targeting many borrowers who are destitute and have no hope of repaying. Most Social Security recipients rely on their checks as their primary source of income, other research shows.

Daniel Pianko, a managing director of University Ventures, which invests in for-profit and nonprofit schools, says the government may be worsening the troubles of older borrowers by promoting programs that set monthly payments as a share of borrowers’ earnings. Payments under “income-driven repayment” programs frequently cover only part of the interest and not the principal, allowing balances to grow.

In that sense, the income-driven repayment programs have the same effect as payday lenders, trapping poor borrowers in a growing amount of debt.

“Every month and every year the loan balances go up, which means by definition this problem will only get worse,” Mr. Pianko said.

Beverley Etan, 63 years old, worries she will have her Social Security checks garnished when she retires.

The nursing-home employee from Arkansas says student-debt collectors have already been garnishing her income-tax refunds over a federal loan from the early 1990s that she took out to earn an associate degree in business administration.

Ms. Etan said she couldn’t find a decent-paying job after earning the degree and ran up credit-card debt while raising three children on her own. She filed for bankruptcy in the 1990s but the student debt remained, and the balance has grown due to interest.

She said she has been paying more than $500 a month toward her student loans, but doesn’t see an end in sight.

“I’m tired. I want to stop working,” Ms. Etan said. “If I stop working, that little money that they’re going to give me, that goes towards student loans.”

Write to Josh Mitchell at joshua.mitchell@wsj.com

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