Is This Student Loan Debt Collection Tactic Out of Control?

Flickr / epw.

Much like back taxes and delinquent child support payments, college loan debt cannot be extinguished by bankruptcy. And, much to the dismay of thousands of Americans, long-ago student debt that borrowers thought had either been paid off or forgiven is coming back to haunt them – in the form of income garnishment. 

Wages and Social Security targeted
According to The Wall Street Journal, nearly 175,000 people are experiencing wage garnishment by the federal government for defaulted student loans, a 45% increase from just a decade ago. Possibly, this is due to the tightening of bankruptcy laws that occurred in 2005, making all student loans exempt from bankruptcy – unless a borrower could show undue hardship, a practically unprovable set of circumstances. 

It's bad enough to suddenly have 15% of your after-tax pay taken by the government, but it isn't only working folks who are getting nabbed. Social Security recipients are also feeling the sting of those often long-forgotten loans.

For these retirees, some who are in their seventies and eighties, the situation is especially distressing: not only are they making due on less income, but the intervening years have caused their original debt to balloon, often to unmanageable amounts. In one case, a 67-year-old man saw his original debt of $3,750 increase to over $21,000, which he is required to repay.

Boomers are in particular trouble
Baby boomers are in a real pickle, holding not only their own college debt, in many instances, but that of their children and grandchildren as well. Americans aged 60 and older hold $43 billion in unpaid student loans, and the average debt level is $20,000. That's 60% higher than just nine years ago. In 2013, 156,000 retirees had their Social Security checks garnished for unpaid student loan debt – almost as many as non-retirees. Approximately 4.7 million boomers in their fifties still owe money on college loans. 

There are options
Luckily, there are some steps you can take if the government notifies you that it plans to garnish your Social Security benefits. Don't ignore the notice – you will get a 20-day window in which to request a review on the issue. You can make this request at any time, but you will be subject to garnishment in the meantime.

If you cannot get a hardship exemption, ask about an income-based repayment plan. In the past, you would have had to pay high payments for a few months after your loan came out of default, but a new law has put that onerous requirement in the past.

The new loan rehabilitation rules now clearly state that the government can take 15% of the amount that your adjusted gross income exceeds your state's poverty level. For many retirees on Social Security, that number may be zero, which means you will only have to pay a $5 per month minimum on your debt.

Remember that, for non-tax debt, the first $750 of monthly Social Security income is exempt, so you will never receive a check lower than that amount due to government garnishment. These rules pertain only to federal student loans; private lenders cannot touch your benefits. 

In spite of the apparent heartlessness of the government toward retirees, there is little likelihood that federal student debt will ever be dischargeable like other forms of debt, since the programs are taxpayer-supported.

The new rules take into consideration the lower income of retirees, however – so taking advantage of these repayment options can, at least, make the debt less onerous for those least able to pay.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2014, at 4:57 PM, dusty10x wrote:

    It was my money you borrowed. ( Taxpayer dollars ).....And I want it back....Some new student wants to borrow some but we have to tell him no...Because this deadbeat won't pay us back and we have no more money.......Don't whine about paying back your loan....You do not deserve any relief from the real taxpayers.........

  • Report this Comment On August 31, 2014, at 5:27 PM, NikolaiV wrote:

    Try and get all of your finances out of the way as soon as possible.Plastic only absolutely necessary,and pay it off as soon as the bill comes it.

  • Report this Comment On August 31, 2014, at 6:14 PM, sabebrush6 wrote:

    Why did all these people refuse to pay or ignore these student loans ? I know of one person that stated that they had not bugged him for a long time so he was hoping it would just go away. He thought that a debt older than 10 years without any payment was no long valid. I told him then that it would bite him sooner or later. Some people never learn.

  • Report this Comment On August 31, 2014, at 6:47 PM, Vitabrits wrote:

    The dumbest thing a parent can do for their child/ren entering college now is cosign a loan. My mom is learning the horror when she cosigned a home mortgage with my brother when he bought his condo high in 2007. He's taking a $40k hit when he is going to sell it. My mom is making my brother eat that cost and she can't be happier because now she will truly be debt-free.

  • Report this Comment On August 31, 2014, at 11:46 PM, pyrogal wrote:

    My husband got a student loan for about $3500 before we ever met. He was 40, working full time, and going to school at night. After we started dating, he continued. Just before graduation, he was injured on the job. After several years and legal battles, he was found permanently disabled, and has been receiving Social Security Disability (SSI) He is now 57. He was never able to use his degree or education. He put the loan on forbearance, which has to be done annually. He has tried many times to get the loan discharged due to his disability. The work comp and Social Security doctors who found him permanently disabled refused to sign the student loan forms, saying they didn't have anything to do with loans. His primary care physicians (several over the years) and pain management specialists (two different ones) refused to sign the forms, since none of them had "declared" him disabled. Now, the loan balance is over $7000. Every year he does the forbearance for another 12 months. He has called the various loan agencies (they keep moving the loan around - currently he's with DirectLoans), and they can't/won't help him. Wish we could figure a way out of this Catch-22.

  • Report this Comment On September 01, 2014, at 7:15 AM, gwatsof195577 wrote:

    Saw my kid's study habits in school, and decided a long time back I would never co-sign for a student loan... one of the best decisions I ever made....

  • Report this Comment On September 01, 2014, at 4:10 PM, jeffreyjohnson77 wrote:

    I had mine forgiven after my stroke had to send paperwork from dr few times. Funny if they had not raised my payment by 4 times I would of keep paying but it was either pay them or buy medicine to prevent another stroke.

  • Report this Comment On September 01, 2014, at 5:40 PM, qwerasdf wrote:

    Education should be free to legal citizens.

  • Report this Comment On September 01, 2014, at 5:45 PM, oldman1 wrote:

    I cannot believe some of the heartless, cruel comments on here. #1 - This money is not "yours" as a "taxpayer". This money, like all other loan money in this economy, was CREATED OUT OF THIN AIR. When a person signs for the loan, a check is cut to the school / student and a debit is created on their account. #2 - Donald Freakin' Trump has declared bankruptcy FOUR TIMES. FOUR TIMES. Let that sink in nice and deep. He is a BILLIONAIRE. The Cities of Detroit and Stockton, CA have declared bankruptcy. They get to STEAL for a living, for crying out loud, and because they couldn't manage the money they STOLE from "taxpayers" in the form of fines, taxes, etc., they get to declare bankruptcy. Now, they get to default on paying back cops, firefighters, and teachers their pensions that they worked all their lives to build up. Now, if you want to talk about "stealing" - how about a city who gets to have a cop pull you over for driving in a manner they don't like, then give you a bill for a few hundred dollars. Or, they just mail you a bill for the house you already own (property taxes) then, if you don't pay it, men with guns show up and kidnap you and put you in a cage. Or how about this one: A guy borrows money on an SBA loan, or FHA loan, or US Dept of Ag loan, or VA loan, and due to whatever reason he cannot pay it. He gets to declare bankruptcy and walk away from it. THESE WERE GOVERNMENT LOANS TOO. Why is this any different from a student loan? Because some crooked politicians got a few suitcases full of money to write it on a piece of paper, and "make it so". That's why. If you want to find out what real pain is, go on over to student loan justice dot org and read the "victims" section. Furthermore, if these people cannot bankrupt out of these loans, and the price of tuition keeps going up, who is going to buy houses, cars, durable goods in the future to provide earnings for your precious stocks to go up??? You might want to rethink your cold, heartless stance towards debtors before this disaster train wrecks the entire economy. Deut. 15:1-2, Deut 15:7-10 - read these Bible scriptures. This is where our bankruptcy code comes from. If it is ok for cities and billionaires and others who borrow from other gov't programs to declare bankruptcy, why not students when things go wrong for them???

  • Report this Comment On September 01, 2014, at 6:15 PM, alancollinge wrote:

    For being an investment community this comment board displays a shocking ignorance about the student lending system, a shamefully self-serving disregard for free-market mechanisms- such as bankruptcy, and a dialectic more suited to a boiler room.

    Hey Dusty: Did you know that the federal government has been making a PROFIT, NOT A LOSS on student loan defaults for many years?

    Do you even have a clue about the systemic importance of bankruptcy protections for keeping the price of a good or service rationally priced?

  • Report this Comment On September 02, 2014, at 12:49 AM, alancollinge wrote:

    Hey Dusty:

    How did the taxpayers make out on this lady?

    Name: Witheld

    State: OR

    I graduated in 1991 owing 40,000 on my student loans. I was a single parent with 4 children. I felt that I was misled by Sallie Mae that I would be able to repay with an income sensitive adjusted to my gross income. I felt at the time I would be able to repay. I had to take a position topping out at only $10.00 an hour and when my payments became due, Sallie Mae was unable to lower my payments to an income sensitive. I don't remember all the reasons at this point. Needless to say, they did offer me a forbearance until such a time as I could pay. I accepted that as I did not have any other choice at the time. I would have had payments at over $400.00 a month.

    That was just the beginning of my nightmare. After about 3 forbearances and 2 defaults (both of which I made payments continually but they were not the whole payment that Sallie Mae wanted at the time). I have not missed a payment except during the times of the forbearances.

    I was not allowed to take advantage of the National Health Repayment Plan because I had the 'defaults' on my record, even though I made payments during the duress and threats of the defaults.

    I have (in the past) hired 2 attorneys, asked for help from the Northwest Education Association, had my loans transferred to the Dept of Education Ford Foundation. All to naught. I have not been able to keep up even though I have paid my original 40,000 at least 3 times over.

    My children are now grown, I make more money but it is still not enough to make a full payment. Last year they the Ford Foundation transferred my loans back to Sallie Mae. I contacted an advocate for Student Loans, she did nothing for me. The nightmare began again with Sallie Mae immediately saying I was a month behind in my payments because the month prior the payment went to Ford. I have been paying an Income Sensitive Loan repayment for several years and last month it became due. I was told I owed $2740 dollars in current and interest payments. I called and they told me to reapply. I just found out that I do not qualify for Income Sensitive because I have some kind of Direct Loan??? That has never been the case in the past and for the last year since my transfer back to them, they have been taking my money!

    I now am asked to pay $1700 a month. I am 62 years old. I started out owing $40,000; I have made payments for at least 20 of the last 23 years. I now owe $108,559.89 and it's soon to capitalize because I cannot make a $3,000 payment and $1,700 monthly. I was paying until last month $600.00. I would so very much like to retire but my retirement will not be mine. They will put a lien on my home. I am tired, I have worked this whole time. I have paid what I could hoping that someday there would be some kind of relief for a poor elderly lady like me. Is there anything out there I haven't tried?? I need some help!

    Is this what you like? Are these the kinds of returns that float your boat?

  • Report this Comment On September 02, 2014, at 11:48 AM, sakimov71 wrote:

    Current federal student loan underwriter here for the Department of Education and former debt collector.

    This is not a student loan debt collection tactic necessarily, this is a negative ramification of having ferdeal defaulted student loans. All of your rights as a federal student loan borrower are outlined in the promissory you that is signed by you, the loan borrower. It was your choice, as a borrower, to take out loans in order to go to school, you have to live with the negative ramifications if you default.

    People need to stop acting neglegent and feeling victimized, it is your responisbility to pay your debts, no one elses. Also, as a result of the CFPB (consumer financial protection bureau), collection agencies, especially ones contracted out by the Department of Education, are required to basically be nice to you due to fear of harrasment lawsuits or losing contracts. Instead of hardnosed collections, its more of customer service.

  • Report this Comment On September 08, 2014, at 1:06 PM, alancollinge wrote:

    Hey Sakimov,

    Please tell us where in the promissory note for federal loans it is stated that universal consumer protections including bankruptcy protections, statutes of limitations, and others are absent from student loan debt.

    You can't because THEY DON'T.

    As a former debt collector, it bothers me greatly that you now work directly for the Department of Education. It only serves to further reduce the public's confidence in the federal lending program. You should know what a bad faithed, predatory lending system is, and that you have been profiting from one for years.

    Pointing to legalese with regqrds to a predatory, bad-faithed loan is beyond meaningless.

    You bring shame upon a lending system that, if the Congress of 1965 who created it could see it, would cringe. They would see to it that you and everyone like you involved with it were expelled and forbidden from ever working in government again.

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