Unfortunately, the answer is yes, and you might be surprised by one of the reasons why – unpaid student debt. A recent report, “Snapshot of Older Consumers and Student Loan Debt” by the Consumer Financial Protection Bureau, sounds the alarm that delinquencies for unpaid student loans are on the rise:
“The number of consumers age 60 and older with student loan debt has quadrupled over the last decade in the United States, and the average amount they owe also dramatically increased. In 2015, older consumers owed an estimated $66.7 billion in student loans. This trend is not only the result of borrowers carrying student debt later in life but also the growing number of parents and grandparents financing their children’s and grandchildren’s college education.”
There are now about 2.8 million Americans who are 60 and older with at least one active student loan. Of those, nearly 40% of federal student loan borrowers age 65 and older are in default. Forty thousand of these borrowers had their Social Security benefits garnished to repay a student loan, up from 8,700 in 2005. If Social Security benefits are a major source of a person monthly income, a benefit offset could create a financial hardship.
As you will see below, student debt is only one of the reasons your social security benefits may be garnished.
Four Reasons your Social Security Benefits can be Garnished:
- To enforce child support and alimony obligations
- For certain civil penalties under the Mandatory Victim Resolution Act
- With a Notice of Levy to collect overdue federal taxes
- To withhold and pay another federal agency for a non-tax debt you owe to that agency according to the Debt Collection Improvement Act of 1996.
It is the Debt Collection Improvement Act that allows the government to offset Social Security benefits for the repayment of student loans. Only federal student loans are subject to this rule, not private loans.
For student loans, the government can take 15% of Social Security benefits as long as the balance doesn’t fall below $750. There is no statute of limitations on the debt.
For unpaid federal income tax, the government can take 15% no matter how much money is left. No surprise there.
For child support and alimony, laws vary by state. The maximum amount that can be garnished is 50% of the person’s Social Security benefit if they support another child, 60% if they don’t support another child, or 65% 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 deposits, and protect that amount from garnishment by private creditors. For example, if Mary had two monthly Social Security deposits to her account each for $1,200, her bank would be required to protect $2,400 from garnishment.
It’s unfortunate, but as the CFPB report indicates, more and more retirees are filing for their benefits only to discover that some of their income has been garnished to pay off old debts. Keep this possibility in mind before taking out or co-signing on federal student loans to pay for your children or grandchildren to go to college. As with any new debt, you must carefully consider the risks beforehand – in this case, to your Social Security retirement income. As high school seniors across the country receive their acceptance letters and weigh their options for the fall, this becomes especially important.
Steven C. Johnson, ChFC, a financial planner with Finivi, has helped many clients over the past 27 years maximize their social security retirement income benefits. Steve is a well sought out speaker for numerous private and public corporations, educational institutions, and social and fraternal organizations on the topics of Social Security and Retirement Income Planning. Do you need help maximizing your Social Security retirement income? You can call (800)530-6635 for a complimentary consultation or click here to schedule online.