By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as writes occasional travel pieces for The National.
Here’s a heartbreaking Uncle Sam as Scrooge story, just in time for the holiday season– a real Christmas classic, with no ghosts — past, present, future– to set all right by the end.
The number of older Americans defaulting on student loans has burgeoned over the last decade, with many embarking on degree courses or skills training or agreeing to co-sign loans for friends or other family members.
No doubt the financial crisis accounts for some of this trend toward pursuing further education, with older workers often facing significant obstacles to securing employment if they’re unfortunate enough to lose a job.
“[B]orrowers age 50 and older have considerably higher rates of default on their federal student loans,” compared to younger borrowers, the Government Accountability Office said in a report released yesterday. The federal government is increasingly garnishing the Social Security benefits of these older defaulting student debtors, leaving these unfortunate beneficiaries with benefit levels that fall below federal poverty guidelines.
In 2015, the federal government seized some of the Social Security benefits of 114,000 people age 50 or older. Over half of these unfortunate people were receiving Social Security disability (as opposed to retirement benefits).
Impact of Offsets on Older Borrowers’ Social Security Benefits
From the GAO’s summary of the highlights of its report:
In fiscal year 2015, Education collected about $4.5 billion on defaulted student loan debt, of which about $171 million—less than 10 percent—was collected through Social Security offsets.
In addition to causing hardship, the problems of these defaulters continued (according to the GAO summary):
More than one-third of older borrowers remained in default 5 years after becoming subject to offset, and some saw their loan balances increase over time despite offsets. However, nearly one-third of older borrowers were able to pay off their loans or cancel their debt by obtaining relief through a process known as a total and permanent disability (TPD) discharge, which is available to borrowers with a disability that is not expected to improve.
Shockingly, however, even those who qualified for a TPD discharge could soon find themselves poleaxed by further snafus– including having this relief cancelled if they failed to comply with annual bureaucratic certification procedures.
According to the GAO summary:
GAO identified a number of effects on older borrowers resulting from the design of the offset program and associated options for relief from offset. First, older borrowers subject to offsets increasingly receive benefits below the federal poverty guideline. Specifically, many older borrowers subject to offset have their Social Security benefits reduced below the federal poverty guideline because the threshold to protect benefits—implemented by regulation in 1998—is not adjusted for costs of living…. In addition, borrowers who have a total and permanent disability may be eligible for a TPD discharge, but they must comply with annual documentation requirements that are not clearly and prominently stated. If annual documentation to verify income is not submitted, a loan initially approved for a TPD discharge can be reinstated and offsets resume.
Genesis of the GAO Report: Role of Senators McCaskill and Warren
The GAO report was prepared at the request in April 2015 of Claire McCaskill, Ranking Member of the Special Committee on Aging of the United States Senate and Senator Elizabeth Warren (who also serves on the same committee). The problem of default and subsequent Social Security or wage garnishment has accelerated throughout the last decade and is only projected to worsen as the baby boom generation retires from active employment.
If you want a depressing read, I encourage you to read the full GAO report. If you lack time to do that, the following press release, which I pulled from Senator McCaskill’s Senate website and from which I quote from at length below, summarizes the most egregious findings. (If you would prefer to grab your copy of the same press release from Senator Warren’s website, you may find it here).
The report’s troubling findings included:
- The cohort of those over 50 in student loan debt, over 7 million Americans, is growing much faster than younger cohorts. Since 2005, Americans aged 65 and up saw their total student loan debt grow by 385 percent.
- The number of Americans whose Social Security checks are being garnished by the government to recoup defaulted student loans has increased by 540 percent in the last decade to over 114,000 older borrowers.
- Since 2004, the number of seniors whose Social Security benefits have been garnished below the poverty line has increased from 8,300 to 67,300.
- Thirteen percent of borrowers 50 or older at the time of their initial offset died while their loans were still outstanding.
“This report shows us that seniors clearly aren’t immune to the student loan crisis—they’re deeply impacted by this issue to the point that it’s leaving many of them in a dire financial situation,” McCaskill said. “We could have hundreds of thousands of American seniors living in poverty due to garnished Social Security benefits if this trend continues, and we shouldn’t allow that to happen.”
“The hard-earned Social Security checks that are the sole source of income for millions of seniors should not be siphoned off to pay interest and fees on student loan debt,” said Warren. “It’s no wonder many Americans don’t think Washington works for them: our government is shoving tens of thousands of seniors and people with disabilities into poverty through garnishment every year—and charging them $15 every month for the privilege—just so that the Department of Education can collect a little bit more interest and keep boosting the government’s student loan profits. This is predatory and counterproductive, and Congress should pass the bill I’ve cosponsored to put a stop to this practice.”
Some of the report’s troubling findings included that more than 70% of garnished Social Security benefits were going toward fees and interest, and not paying down seniors’ principal balances—leaving many seniors with a reduced standard of living, in a cycle of debt they could not escape.
I reiterate one of Senator Warren’s points just in case it slipped by: The Treasury Department charges the unfortunate defaulters $15 in processing fees per month to garnish their Social Security benefits, according to this article in the Washington Post.
And as the Wall Street Journal reports in this article, government efforts to assist borrowers may actually be doing anything but for some older borrowers:
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.
What Is to Be Done?
The GAO was not completely insensitive to the plight of these Social Security beneficiaries and indeed recommended (again, from the GAO summary):
GAO suggests that Congress consider adjusting Social Security offset provisions to reflect the increased cost of living. GAO is also making five recommendations to Education, including that it clarify documentation requirements for permitted relief resulting from disability. Education generally agreed with GAO’s recommendations.
Is this the best that anyone can come up with?
Senators Warren and McCaskill are both proposing legislative solutions. In 2015, Senator Warren co-sponsored the Benefits Restoration Act, a measure that would exempt Social Security Benefits from garnishment, as reported by the Washington Post here. That bill succumbed in committee, but Warren is currently calling on her website for Congress to pass that bill. The Post also reports that Senator McCaskill intends to introduce legislation that would block the garnishing of Social Security benefits is so doing would cause beneficiaries to fall below the poverty line.
Somehow, I don’t see this issue front and center on the agenda of the incoming Congress and the Trump Administration. But it should be.