The Government Accountability Office recently analyzed the Social Security garnishment process for defaulted student loans, called “offset.” If a Social Security beneficiary has defaulted on a federal student loan, the unpaid balance can be offset against benefits, even though these benefits account for 90 percent or more of income for about 1 in 3 persons aged 65 and older and even though they reduce the beneficiary’s income to below the federal poverty level.
The GAO reported that 37 percent of student loan borrowers age 65 or older are in default, roughly a third of a million people. Three-quarters of these had taken loans only for their own education, and most owed less than $10,000 at the time of initial offset. The majority of these loans were taken out at mid-career age, presumably in a re-education effort. Eighty percent of borrowers age 50-64 subject to offset were disability beneficiaries, and of those older than 65, 23 percent had previously received disability benefits. Roughly 70,000 older beneficiaries have had benefits reduced below the federal poverty threshold because of student loan offsets.
There are limits on offsets. Collectors can take 15 percent of a monthly payment, but the benefit cannot be reduced below $750. This “floor” was established in 1998, when it represented 112 percent of federal poverty guideline and has never been changed. If indexed to inflation, the floor would now be $1,125.60. Instead, the protected threshold is 76 percent of the federal poverty guideline for a single adult in the continental United States. The average offset for a Social Security beneficiary age 65 or older is $146. Extrapolating, this suggests that the average elderly single debtor was trying to live on about $900 per month before garnishment.
Since the fees and accruing interest are subtracted before any credit against principal, only about 11 percent of the offset funds collected from Social Security beneficiaries goes toward their loans’ principal, and most older borrowers subject to offset never see their principal reduced substantially and never can pay it off.
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There are things borrowers with a William D. Ford Federal Direct Loan, the Federal Family Education Loan Program, the Federal Perkins Loan Program or a TEACH Grant can do.
First, the borrower may challenge the offset as improper for some reason, perhaps identity, forgery or mathematical error.
A borrower may request a financial hardship exemption or reduction. Unfortunately, neither the Department of Education’s website nor offset forms it sends out tell borrowers this. Borrowers must request information, perhaps learning about it from advocacy groups.
Borrowers who are permanently disabled can be discharged. Disability for this purpose is defined more restrictively than by Social Security. There are also special rules for veterans unemployable due to service-connected disability.
There are at least two consequences of a disability discharge. First, it can be lost, since for three years, a beneficiary must notify the DOE if annual earnings increase over the federal poverty level for a family of two ($1,353). Moreover, the beneficiary must furnish annual employment earnings even if below the federal poverty level. If not, the loan is reinstated. In 2015, roughly 61,000 “disability-discharged” loans were reinstated because of reporting failures, and only 383 borrowers who earned their way out with additional income.
Secondly, if the debt is more than $600, a discharge is reported to the IRS. The amount discharged is treated as income, although an insolvency exception that may apply. However, a tax return is required.
DEBT CONSOLIDATION AND INCOME BASED REPAYMENT PLAN
A third ground is more complicated but can work for an older borrower living on a limited fixed income that will not ever increase dramatically.
A debtor may consolidate a loan with other loans into one single obligation (or just “consolidate” a single loan). One payment option for a consolidated loan is an income based repayment plan (called an “IBR Plan”). One IBR is up to 15 percent of discretionary income. Discretionary income is defined income more than 150 percent of the federal poverty guideline applicable to the borrower’s family size (contrasted to the “floor” of 75 percent). If someone’s income is below this, the repayment obligation is zero.
This strategy does not protect a beneficiary whose income increases during the repayment period. Moreover, there are tax consequences for beneficiaries to discharge.
Although student loans generally cannot be discharged in bankruptcy, undue hardship can cause a discharge. One court stated the rule to be (1) the debtor cannot maintain a “minimal” standard of living if forced to repay; (2) additional circumstances exist showing that is likely to persist for a significant portion of the repayment period; and (3) the debtor has made good faith efforts to repay.
Each of these options can help in appropriate situations.
Amos Goodall is an attorney with Steinbacher, Goodall & Yurchak in State College.