It’s a horrible thought. You finally get to the time in life when you can reap the benefits of a lifetime of work, you file for your Social Security benefits, and discover that some of your benefits will be garnished to pay off old debts.
This reality hit home recently with a report, Snapshot of Older Consumers and Student Loan Debt by the Consumer Financial Protection Bureau, and a recent article in the Wall Street Journal, Social Security Checks Are Being Reduced for Unpaid Student Debt. The number of consumers over age 60 with student loan debt has quadrupled since 2005, and the amount owed by older consumers has dramatically increased, to $66.7 billion. Most of these loans were taken out to finance children’s education, either directly or co-signed with the student as the primary borrower.
Nearly 40% of federal student loan borrowers age 65 and older are in default. Forty thousand of these borrowers had their Social Security benefits offset to repay a federal student loan, up from 8,700 in 2005. Since Social Security benefits are the only source of regular retirement income for 69% of beneficiaries 65 and older, this means that benefit offsets may impose serious financial hardship for many of the affected older borrowers. As would be expected, borrowers who are in default on student loans have less saved in retirement accounts.
Only federal student loans are subject to Social Security garnishment. Private loans are not. Other debts for which Social Security can be garnished include federal income taxes and other federal debts, child support and alimony, and victim restitution. Both Social Security retirement and disability benefits may be garnished; SSI, which is a welfare program for the poor, is protected from garnishment
For student loans, the government can take 15% of Social Security benefits as long as the balance doesn’t drop below $750. There is no statute of limitations on the debt.
For federal income tax, the government can take 15% no matter how much money is left.
For child support and alimony, laws vary depending on the state. The maximum amount that can be garnished is 50 percent of the person’s Social Security benefit if they support another child, 60 percent if they don’t support another child, or 65 percent if the support is more than 12 weeks in arrears.
Private creditors may not garnish Social Security benefits. If they attach a bank account to which Social Security benefits have been automatically deposited, the bank is required to look at the debtor’s previous two months of transactions to determine if the debtor received any Social Security benefits by direct deposit. For example, there were two $1,500 Social Security deposits, the bank would protect $3,000 from garnishment.
If a person receives a Social Security check and deposits it in the bank themselves (rarely done anymore), the bank can freeze the entire amount in the account. The person would then be required to go to court and prove the money in the account came from Social Security.
Moral of the story on my part: Be careful about how you help your children for college! It’s their education so these should be their loans. If you commit, and there’s default, you’re on the line. Other Federal issues may also get you in trouble such as you owing taxes or other obligations as stated above.
Other posts on debt issues.
- Ask CFPB: Can a debt collector take my Social Security or VA benefits?
- What are the laws allowing the garnishment and levy of Social Security benefits?
- More People Over 60 Are Struggling To Pay Off Student Loans, Report Finds
- Baby boomers and student debt—the problem no one is talking about
- The Number of Older Student Loan Borrowers Is Rising
Many thanks to Elaine Floyd, CFP®, Director, Retirement and Life Planning
Horsesmouth, LLC for this article.