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.