By now we should be used to Uncle Sam changing his proverbial mind. The pattern has become fairly routine: a new policy is announced, followed by a great hue and cry of anger and disbelief, followed by a backpedaling reversal of the policy that caused all the fuss in the first place. 

This time the issue is student loans – and before our older Blog readers dismiss this story as irrelevant to retirees, think again. Had this particular policy not been reversed, or at least delayed, hundreds of thousands of retirees who are in default on student loans might have seen their Social Security benefits withheld, or severely reduced.  

Outstanding Student Loans and Social Security Benefits 

Our interest in this story was prompted by this article from Investopedia which we read this week, in which reporter Elizabeth Guevara alerts us to a policy reversal by the Department of Education. Last month, officials had announced the immediate resumption of collection efforts (suspended during COVID) to recover the billi0ns of dollars of outstanding student loans that are in or near default. These recovery efforts, based on reports at the time, would have jeopardized the Social Security benefits of nearly half a million retirees. 

But last week, Guevara writes, the Department backtracked. While aggressive collection efforts are very much in play, Social Security benefits are no longer at risk. We were frankly a bit surprised to see how impactful these student loan collection policies would have been to hundreds of thousands of seniors, some having borrowed for their own education but many for the schooling of kids and grandkids.  

We uncovered a bit of background on this issue. Let’s take a deeper look. 

10 Million Borrowers in Default, Billions at Risk 

Last May, the Department of Education announced that it would immediately restart collection efforts aimed at the nearly 10 million student loan borrowers who are either in default (meaning they’ve made no payments in over one year) or “late-stage delinquency” (more than 90 days in arrears). The threat, the Department claims, is that, unless collections resume, “almost 25 percent of the federal student loan portfolio will be in default.” That loan portfolio is worth an estimated $1.6 trillion. 

The aggressive resumption of loan collection means borrowers in default can find their wages garnished, with some of their pay withheld by court order and sent directly to the creditor, in this case the Department of Education.  The reason many seniors are at particular risk of garnishment comes down to two words: “Social Security.” 

Collection Efforts Can Put Social Security Benefits at Risk 

In January, the Consumer Financial Protection Bureau published this article explaining how Social Security payments and student loan defaults are connected. “When borrowers default on their federal student loans,” the CFPB states, “the U.S. Department of Education…can collect the outstanding balance through forced collections, including the offset of tax refunds and Social Security benefits and the garnishment of wages.”  

The CFPB paper goes on to define the scope of the problem. “Among the borrowers who are likely to experience forced collections are an estimated 452,000 borrowers ages 62 and older with defaulted loans who are likely receiving Social Security benefits.”  

In other words, since early May, close to half a million Social Security beneficiaries might have been at risk of losing at least a portion of their benefits to a student loan collection effort which had been on hold since the early days of the COVID pandemic. 

Policy Reversal Brings a Sigh of Relief – for Now 

This brings us to Guevara’s Investopedia article and the recent policy reversal regarding Social Security. It’s good news for beneficiaries, at least for now. 

“Federal student loan borrowers who have not paid their loans in over 270 days and receive Social Security benefits will not see their benefits garnished during collections,” Guevara writes. “Although Social Security beneficiaries will still be required to repay their defaulted student loans, this could help many stay on their feet.” 

Department Claims Commitment to Protect Beneficiaries 

Guevara notes that this action by the Department of Education reverses the original plan announced just last month to garnish all wages, federal and non-federal. “In an apparent change of course,” says the article, “the Department of Education said Tuesday that Social Security benefits will not be garnished for student loan borrowers who default.” 

Ellen Keast, a Department of Education spokesperson, gave a statement to Investopedia inn which she said no Social Security benefits had been garnished since bthe resumption of student loan collections.  

“Keast also said the Department has ‘put a pause’ on any future garnishments,” adding, “The Trump Administration is committed to protecting Social Security recipients who oftentimes rely on a fixed income.” 

Original Collection Policy Could Have Cut Benefits by 15 Percent 

The decision not to withhold a portion of Social Security payments from beneficiaries who have defaulted on their student loan debt marks a notable policy shift, says Guevara 

“Originally,” she writes, “the department said if borrowers failed to bring their accounts into good standing by the summer, it would restart the Treasury Offset Program. Under that program, the government withholds portions of any federal payments, including up to 15 percent of Social Security.” Her article adds that the department had already started garnishing federal tax refunds in mid-May. 

There was no explanation provided for the policy change, but clearly the politics of Social Security played a part. 

Student Loan Borrowers are Getting Older 

It’s clear that the demographics of student loans are shifting. Many of those who borrowed to fund their own education are now at retirement age while others borrowed  to aid loved ones. 

“Pausing Social Security payments could help many, as delinquent and defaulted borrowers are getting older on average,” says Investopedia. “According to data from the Federal Reserve Bank of New York, more than a quarter of borrowers 50 years and older are past due on their loans, likely driven by the rise in Parent PLUS loans, which parents or grandparents are still paying off.” 

Parent PLUS Loans Come with Major Red Flags 

We looked into the Parent PLUS Loan program, as described by BestColleges.com, and found some startling facts. (The PLUS acronym stands for Parent Loan for Undergraduate Students.) 

The BestColleges website reports that, as of the end of 2023, there were nearly 4 million Parent PLUS loans in force, with a combined indebtedness of over $112 billion. The average loan balance now tops $30,000. 

But the most troubling fact is that roughly 13 percent of borrowers default within four years of their child’s graduation. Moreover, these loans are your obligation forever. “Parents are permanently responsible for repaying the loan,” said a related article from Investopedia: “The loan balance can’t be transferred to the child, even if the child has the means to repay it.” 

Bottom Line: Borrow with Care and Prepare to Pay It Back 

Does all this make student loans a mistake? Not necessarily – but it definitely suggests extreme caution. If the CFPB is correct, there are now more than 450,000 borrowers currently receiving Social Security benefits who are in serious default. This recent policy change may buy them some time, but there’s no way to predict when another reversal could jeopardize their benefits once again. 

Finally, Investopedia reminds us that these borrowers are by no means off the hook. 

“Social Security beneficiaries will still be required to pay back their defaulted student loans,” Guevara concludes. “[Department spokesperson] Keast told Investopedia that the department would continue to reach out to borrowers about affordable repayment options and work to get them back into good standing.” 

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(originally reported at www.investopedia.com)