How student loans could hit your Social Security

It’s no secret that falling behind on student loan payments can squash a borrower’s hopes of building savings, buying a home or even finding work. Now, thousands of retirees are learning that defaulting on student-debt can threaten something that used to be untouchable: their Social Security benefits.

According to government data, compiled by the Treasury Department at the request of SmartMoney.com, the federal government is withholding money from a rapidly growing number of Social Security recipients who have fallen behind on federal student loans.

From January through Aug. 6, the government reduced the size of 115,000 retirees’ Social Security checks on those grounds. That’s nearly double the pace of the department’s enforcement in 2011; it’s up from around 60,000 cases in all of 2007 and just six cases in 2000.

The amount that the government withholds varies widely, though it runs up to 15 percent. Assuming the average monthly Social Security benefit for a retired worker of $1,234, that could mean a monthly haircut of almost $190.

“This is going to catch an awful lot of people off guard and wreak havoc on their financial lives,” said Sheryl Garrett, a financial planner in Eureka Springs, Ark.

Many of these retirees aren’t even in hock for their own educations. Consumer advocates say that in the majority of the cases they’ve seen, the borrowers went into debt later in life to help defray education costs for their children or other dependents.

Harold Grodberg, an elder law attorney in Bayonne, N.J., said he’s worked with at least six clients in the past two years whose problems started with loans they signed up for to help pay for their grandchildren’s tuition. Other attorneys say they’re working with older borrowers who had signed up for the federal PLUS loan-a loan for parents of undergraduates-to cover tuition costs.

Deanne Loonin, a staff attorney at the National Consumer Law Center in Boston, said she’s been working with an 83-year-old veteran whose Social Security benefits have been reduced for the past five years.

The client fell behind on a federal loan that he signed up for in the ’90s to help with his son’s tuition costs; Loonin said the government’s cuts have left the client without enough cash to pay for medications for heart problems and other ailments.

Roughly 2.2 million student-loan debtors were 60 and older during the first quarter of 2012, and nearly 10 percent of their loans were 90 days or more past due, up from 6 percent during the first quarter of 2005, according to the Federal Reserve Bank of New York.

“It’s really a unique problem we haven’t had to face before, and it’s only going to grow,” said Robert Applebaum, founder of Student Debt Crisis, a nonprofit advocacy group in Staten Island, N.Y.

The threat of Social Security cuts adds to the overall financial woes faced by the aging baby boomer generation.

That same generation has been slammed by the soaring cost of college, whether for their kids or themselves.

As SmartMoney.com reported this spring, tuition and fees have almost tripled in the last 20 years, growing far faster than wages.

Unlike other consumer debts, student loans typically can’t be wiped out in bankruptcy. And changes in the law over the last couple of decades have given Uncle Sam more power to pursue defaulters, said William Brewer, president of the National Association of Consumer Bankruptcy Attorneys.

The Department of Education, which provides federal student loans to borrowers, says it tries to work out payment plans with people who fall behind on their loans.

Justin Hamilton, a spokesman for the department, said that accounts aren’t sent off to collections until almost two years of nonpayment; if collection doesn’t yield results, the loan balance goes to the Treasury Department, which can reduce Social Security checks.

“It’s when people aren’t making any attempt whatsoever (to pay) that they start heading down that road,” Hamilton said.

For its part, Treasury said it reaches out to borrowers twice to set up a payment plan or otherwise resolve their debt before offsetting money from their Social Security check.

And Treasury won’t withhold money from monthly checks that total $750 or less, said Ronda Kent, deputy assistant commissioner for debt management services at the Treasury Department’s Financial Management Service.

Compared to present-day retirees, younger generations are in deeper debt, which means stories of Social Security garnisheement could become more commonplace when they enter retirement.

Borrowers in their 20s and 30s owe roughly $600 billion, according to the New York Fed.

They’re also leaving college with more debt than their predecessors: 66 percent graduated this spring with debt, and their student loans averaging $28,720, up from $9,320 in 1993, according to FinAid.org.