Individuals are experiencing increasingly more consequences for defaulting on their student loans. As we discussed in a previous post, student loans are almost impossible to get rid of through bankruptcy. According to a recent moneysmart.com article, the federal government is now increasing its enforcement of garnishing Social Security benefits on borrowers who have defaulted on their federal student loans.
Under 1996 Debt Collection Improvement Act, the federal government has the power to offset Social Security payments when borrowers default on their federal student-loan obligations. With more individuals defaulting on these loans, the federal government has nearly doubled the number of Social Security payments garnished this year compared to last year. Although the amount withheld may be relatively small–up to 15% of an individual’s benefits– any decrease to a retiree’s fixed income can cause financial difficulties.
It is important to realize that an individual’s Social Security benefits can only be garnished when they defaulted on a federal student loan like a Stafford or Plus loan, not private student loans through a bank.
Most of retirees who are having their Social Security benefits reduced did not even receive the education that the student loan provided. They are on the hook because they co-signed on a student loan for their children or grandchildren and now no one can make payments.
Defaulted student loans are not only an issue that needs to be discussed if you are accessing your financial outlook and considering bankruptcy, but also now should be a topic when you analyzing your estate planning needs and determining the amount of cash flow you will have during retirement.