Are you one of the estimated two million Americans age 60 or older that still owe on their student loans? It can be tough to be saddled with student debts when you’re in your 30s or 40s but it can be lots worse if you’re in your 60s. You could even find that those old student debts are jeopardizing your Social Security benefits. This is because Uncle Sam can be a very unforgiving relative as our government has the right to seize portions of the Social Security checks of those that failed to repay their federal student loans. In fact, over the past year the government has withheld the Social Security benefits from 140,000 borrowers that were delinquent on their student loans. To make matters worse the federal government relies more and more on private collection agencies to go after delinquent borrowers and these agencies can make a person’s life nothing short of a living hell.
You could be shocked
If you’re 60 or older and one of those two million Americans that still owe on their student loans you could be shocked when your Social Security check arrives and you find it’s been slashed by $100 or more. If you’re typical you depend a lot on that check to either support you or to supplement your savings. A $100 hit might not seem like much to some people but for those living on Social Security it could mean buying fewer groceries or having to cut back on some other necessity of life.
If you’re not in default
If you are in default on a student loan meaning that you just quit paying on it some years ago that’s one thing. If your loans are in good standing but you’re struggling to meet your payments you could opt for Income-driven repayment. There are actually three Income-driven repayment programs available one of which would set your payment at no more than 15% of your discretionary income. In case you’re wondering about your discretionary income Uncle Sam defines it as the difference between your adjusted gross income and 150% of the federal poverty line, which corresponds to your family size and the state where you live.
There is an even better Income-driven repayment program called Pay As You Earn that would cap your monthly payments at just 10% of your discretionary income. However, this program is available only to those that took out loans very recently. And if you have older Federal Family Education Loans you would not be eligible for this program. However, you could use a similar one called Income-sensitive repayment. This is where you choose a monthly payment amount between 4% and 25% of your monthly income. Unfortunately, you can only use this plan for five years. But you could consolidate your existing Federal Family Education Loans into a new Federal Direct Consolidation Loan and this would then make you eligible to take advantage of the Income-based repayment plans.
Did you take out Parent PLUS loans to help your child?
If you did take out Parent PLUS loans things get a little stickier. These loans are technically not eligible for Income-based repayment but if you were to consolidate them into a Direct Consolidation Loan, they would then become eligible for the Income-contingent Repayment program. While this program also bases your payments on your income and family size your payments would generally be higher than those under Income-based Repayment.
If you are in default
If you just stopped paying on a federal student loan some years ago you are in default. This means you could see up to 15% of your social security benefits garnished. Sadly enough, according to the GAO (Government Accountability Office) more than 150,000 people receiving Social Security benefits saw their Social Security garnished in 2013 as a result of their student loan debts. And of this group 36,000 were over the age of 65.
The good news
If your Social Security benefits are being garnished you could take advantage of some of the options outlined above to reduce the amount being taken out of your check. Under certain circumstances, your payment could be as few as zero dollars. But you will first have to get your loan or loans out of default – either through consolidation or rehabilitation. If you want to do this you will need to contact your lender or loan servicer to discuss your options. Consolidation is fairly self-explanatory but rehabilitation is a bit trickier. To get a loan or loans rehabilitated you and the US Department of Education would have to agree on an affordable and reasonable payment plan. You would then be required to voluntarily make those payments on time and a lender has purchased your loan. At that point your loan will have been rehabilitated and you would again be eligible for benefits such as the Income-driven Repayment programs.
Private student loans
If you cosigned on a private student loan for one of your children then, as you may have learned, you’re on the hook for repaying it. Since private student loans don’t offer the same repayment options as federal student loans you should consider either refinancing or consolidating it. Both Wells Fargo and Discover recently announced that they’d be offering modifications on private student loans for borrowers that are having a tough time financially. You could also contact your lender and see about postponing your payments although your interest will continue to accrue and you may be charged a fee for this.
The worst-case scenario
Failing everything else there is always the “nuclear option” of filing for bankruptcy. Although it is very difficult to get student loans discharged through bankruptcy it is not impossible. There’s what’s called the Bruner test. It’s a three-part test the bankruptcy judge would use to determine whether or not to discharge your student loans. The first part of this is that you must be able to show that you cannot maintain a minimal standard of living based on your current income and expenses if you are forced to repay your loan(s). Second, you must be able to demonstrate that this situation is likely to persist for a large portion of your repayment period. And third, you must be able to show that you have made what’s called a good-faith effort to repay your loans.
It may not be easy
Repaying student loans may not be easy at any age but it can be particularly difficult if you’re an older American. However, if you learn about the alternatives and options available to you this can go a long way towards earning you some peace of mind as you head into 2015.
