Seniors Forced Into Poverty As Education Department Demands Payment

09/11/2014 08:51 pm ET | Updated Sep 24, 2014

The Education Department is demanding so much money from seniors with defaulted student loans that it's forcing tens of thousands of them into poverty, according to a government audit.

At least 22,000 Americans aged 65 and older had a part of their Social Security benefits garnished last year to the point that their monthly benefits were below federal poverty thresholds, according to the Government Accountability Office.

Education Department-initiated collections on defaulted federal student loans left at least another 83,000 Americans aged 64 and younger with poverty-level Social Security payments, GAO data show. Federal auditors cautioned that the number of Americans forced to accept poverty-level benefits because of past defaults on federal student loans are surely higher.

More than half, or 54 percent, of federal student loans held by borrowers at least 75 years old are in default, according to the federal watchdog. About 27 percent of loans held by borrowers aged 65 to 74 are in default. Among borrowers aged 50 to 64, 19 percent of their loans are in default. The Education Department generally defines a default as being at least 360 days past due.

As unpaid student debt approaches $1.3 trillion, the federal watchdog's findings underscore the consequences of increased student debt burdens and the risk they'll wreak havoc on households in the coming years if U.S. workers continue to see little increase in their paychecks, the economy barely grows, and the Education Department's contractors keep borrowers in the dark on repayment options.

"This GAO report strikes me as a kind of canary in a coal mine," Sen. Richard Blumenthal (D-Conn.) said Wednesday during a hearing prompted by the report held by the Senate Special Committee on Aging. "What it says to me is, look at this narrow slice of the Baby Boom generation that now has debt [and] look at its impact ... which is, if anything, more pernicious and insidious than it is for younger people.

"This age group is not only affected in more serious ways, but it is also going to grow," Blumenthal continued. "In other words, this report says: Look out, the cliff is ahead, or the avalanche, [or] maybe it's a tsunami, of older student debt."

Struggling borrowers are rarely able to discharge federal student loans by declaring bankruptcy. As a result, federal auditors noted, their student debts follow them into retirement.

As the increase in average college tuitions outpaces federal borrowing limits for undergraduates, more parents are taking out federal student loans to pay for their children's education. But GAO auditors said the vast majority of loan balances held by older Americans is for their own educations. Among borrowers aged 50 to 64, about 73 percent of their federal student loan debt was for their own schooling. For borrowers aged 65 and older, more than 82 percent of their debts was for their own education.

Some 40 million Americans have student debt, according to the Federal Reserve and the Education Department. The average recipient of federal student loans owed 28 percent more in 2013 than in 2007, after adjusting for inflation, according to Education Department data.

Meanwhile, the typical holder of a bachelor's degree working full time experienced a 0.08 percent decrease in weekly earnings during that same period. Among workers with advanced degrees, median wages increased just 0.02 percent, according to figures from the U.S. Bureau of Labor Statistics.

With student loan debt rising and inflation-adjusted wages falling, borrowers with student loans are reducing their spending to make their loan payments, according to a Federal Reserve survey. Nearly half of Americans said they had to curb their spending last year in order to make monthly payments on student loans.

Some 35 percent of survey respondents who are paying back student loans said they had to reduce their spending by "a little" over the past year to keep up with student debt payments. Another 11 percent said they had to cut back their spending by "a lot."

With consumer spending powering much of the economy, any reduction in household expenditures is likely to dampen growth.

Some 12 percent of federal student loans held by borrowers aged 25 to 49 were in default, according to the GAO.

"One out of every eight student loans held by this group is in default," said Charles Jeszeck, director of education, workforce, and income security issues at the GAO. "That's a lot of loans!"

Rising student loan debt also risks leaving Americans with less money for their retirement, as ever bigger chunks of workers' paychecks are devoted to repaying education loans.

"The presence of student loan debt for those nearing retirement can also affect retirement security as it may keep individuals from saving for retirement," Jeszeck's team said in their report.

According to the GAO, student debt already is affecting older Americans' financial security.

Nearly 155,000 Americans had their Social Security benefits reduced last year as a result of past defaults on their federal student loans, a five-fold increase from the 31,000 borrowers whose benefits were cut in 2002. Of the 155,000 borrowers in 2013, about 36,000 of them were at least 65 years old, according to the GAO.

Part of the reason why the Education Department is putting older Americans into poverty is federal law. Existing rules governing Social Security garnishment specify that the federal government cannot seize more than 15 percent of monthly benefits or take anything that would leave Americans with checks of less than $750.

But the rules, crafted in the late 1990s, have not been adjusted for inflation. The $750 limit was above the poverty level in 1998. Had policymakers raised the garnishment level to keep up with inflation, the level last year would have been $1,073, according to the accountability office. Defaulted federal student loan borrowers with monthly checks below that limit wouldn't have had their benefits garnished.

The Education Department refers defaulted borrowers for Social Security garnishments after the department's collection agencies fail to recoup on the soured debt. Earlier this month, the National Consumer Law Center criticized the department for effectively turning a blind eye to allegations that its debt collectors routinely misled distressed borrowers or provided them false information.

Last year, Education Department-initiated collections of Social Security benefits caused Americans to receive $150 million less than they otherwise would have absent garnishment. The average borrower lost more than $130 every month. The average recipient of old age, survivor and disability insurance, or Social Security, received about $1,182 a month last year, according to the Social Security Administration.

The problem is likely to get worse, the GAO cautioned.

"As the baby boomers continue to move into retirement, the number of older Americans with defaulted loans will only continue to increase. This creates the potential for an unpleasant surprise for some, as their benefits are offset and they face the possibility of a less secure retirement."

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