Can Defaulted Student Loans Cut Impact Your Social Security? What to Know About Your Benefits
Plus, find out what you can do to protect your Social Security benefits in the future
Older Americans are increasingly retiring with student loan debt (around 7.3 million carry student loan debt)—either their own or debt taken on for their children—and many are worried about it affecting their Social Security income. This has especially been the case since the government began collections for those struggling to make payments on their student loans. Wondering if overdue student loan payments could cause your Social Security benefits to be withheld? Keep reading to learn more about the current garnishment policy, plus how you can protect your money in the future.
Can defaulted student loans impact your Social Security checks?
Beginning May 5, the Department of Education started involuntary collections of any student loans that are in default. This is part of the Treasury Offset Program, which allows benefits like tax refunds and even federal salaries to be withheld from borrowers with overdue payments.
While Social Security was initially included in that program, none of the benefits have actually been withheld since this collection process has resumed, reports the Associated Press.
Even more good news? Department of Education spokesperson Ellen Keast has said that there’s a pause on “any future Social Security offsets.” Other federal benefits are still currently eligible for garnishment, however.
What it means to default on student loans
Overdue student loans can fall into two different categories, according to the Federal Student Aid website. In the first case, missing a required payment makes your loan delinquent. Even if you’re only one day late on a payment, your loan is considered past due.
Even delinquent loans can result in some negative consequences. After 90 days, your loan servicer will report it to the national credit bureaus, causing your credit score to drop drastically.
If you still haven’t made payments after 270 days, your loan enters default. It’s at this point that you become eligible for federal collections.
How much of your Social Security can be withheld?
Though defaulting on student loans now won’t lead to garnishment of your Social Security benefits, the government can withhold up to 15 percent of your Social Security benefits for other reasons, like failure to pay child support, alimony or restitution.
As part of this 15 percent rule, the government does have to leave you with at least $750 per month—a threshold that hasn’t been updated in years, explains Paul Miller, CPA, founder at Miller and Company, LLP. This can dent your retirement savings, especially if you’re already on a tight budget.
3 ways to protect your Social Security from garnishment
Janeil Pierre, MBA, an accredited financial counselor and board-certified credit consultant, adds that carrying student loan debt into retirement is becoming normal. Luckily, your loans will not impact your benefits if they are in good standing.
But if you are concerned about garnishment should the pause comes to an end, there are simple strategies you can use to keep more of your money. These include:
Apply for a Disability Discharge if eligible
Not able to work to earn an income? Pierre suggests applying for Total and Permanent Disability Discharge. This would cancel your federal student loans, including those that may be subject to garnishment.
To qualify for TPD Discharge, Safdari notes you must provide documentation of your disability, which could include medical records, or have been receiving Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits for a certain period (typically 24 months). If the discharge is granted, the garnishment on your Social Security payments could immediately be stopped.
Income-driven repayment plans
Under an Income-Driven Repayment Plan, your monthly payment is based on your income and family size. “These plans could lower your monthly payments to a more manageable amount, which could stop or reduce garnishments,” says Safdari. He adds that it can even reduce the garnishment amount or eliminate it altogether if your payment under an IDR plan is very low.
Rehabilitate your loan
This is a program that allows you to work with your loan servicer to get your loans back on track. After completing a set number of monthly payments (usually nine for federal student loans), the garnishment can be stopped, and your loan can be returned to good standing.
Safdari says this option can help you avoid further garnishment by showing a good-faith effort to repay your loan.
The bottom line
“Borrowers concerned about the possibility of Social Security benefits being garnished should act promptly and seek assistance from a professional, such as a student loan counselor or financial advisor, to determine the safest course of action,” says Pierre. This is especially important if they depend on those benefits.
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