Is Grandma Struggling With Student Loan Debt?

In the past ten years, the amount of student loan debt Americans owe has doubled to well over $1 trillion. It’s estimated that this includes more than 700,000 households headed by someone age 65 or older.   According to a report by the General Accounting office, while student loan debt owed by seniors is a “small fraction” of the total, it is growing “at a much faster pace- from about $2.8 billion in 2005 to about $18.2 billion in 2013- more than a six-fold increase.”

In addition, older borrowers have a higher percentage of loans in default.  Last year, 27% of the student loans owed by individuals age 65 to 74, were in default.  Among those 75 or older, the default rate exceeded 50%.

Surprisingly, 73% of the student loans seniors have defaulted on were not taken out to pay for their children’s education, but for their own. In some cases the loans date back decades to when the borrower first attended college.

According to Mike Sullivan, director of education at “Take Charge America,” a Phoenix-based credit counseling service, “Maybe they went to graduate school and never got the faculty position they aspired to and ended up doing adjunct jobs, earning minimum wage and unable to pay off their large graduate school student loans. Now they’re coming back to haunt them.”

But a large portion of student loans owed by seniors have a much more recent origin.  For instance, imagine being laid off in your early fifties.  “Unemployment benefits are predicated on being in a job education program”, says Sullivan.  “It’s recommended they get a degree in healthcare or computer science.  So they took out student loan to do it.”

Sullivan maintains that for some, it was a case of “desperation.”  The student loan was a source of income.  An individual’s community college tuition might have been $1,000, but they took out a loan for $3,000 because they needed the money for living expenses.

Now these individuals are nearing or in retirement with unpaid student loan debt. The average amount owed? $12,000.

Bye-Bye Social Security

The worst thing you can do is ignore the problem.  It won’t go away. Compared to student loans issued by the private sector, the federal government is a lenient lender.  If you miss one or more payments, you get more than a year to either resume paying or work out a new payment plan. The Department of Education even has a staff of loan servicers who can help you.  According to Sullivan, “The federal government is very forgiving about rehabilitating your loan even if you do miss a payment or two… or even 6 or 7.”

But after 14 months, DOE will turn to other methods to collect what it is owed.  Ninety percent of the time this means withholding your tax refund.  Other options include garnishing your wages and filing a lawsuit. You can also be hit with collection fees that amount to as much as 25% of the principal and interest you owe.

In addition, some of your Social Security or disability check can be withheld.  The maximum amount is 15%.   By law the government cannot reduce reducing your monthly benefit below $750-  the poverty line at the time the legislation was enacted years ago.  The problem is that due to inflation the official poverty threshold is now $1,072/month- and the law has not kept up.  As a result, the Department of Education- or any other federal agency to which you owe money- can still request that your Social Security check be reduced to $750/month –  30% below where the poverty line stands today.

Last year the government withheld roughly $150 million in Social Security benefits from 33,000 individuals 65 or older to offset their outstanding student loan debt.

Educate Yourself About Your Options

If your student loan was issued by the federal government you may qualify for one of several different income-based re-payment formulas.  The Department of Education determines what portion of your income you must send in each month.  After 10 years of on-time payments, the outstanding balance on your loan can be forgiven.   However, Sullivan points out that this type of plan is based on the borrower’s income, that is, the student’s.  In other words, seniors can only apply for this option if the loan was for their own education.  And, there is no income-based re-payment plan if you co-signed a loan, e.g. for your grandson.  In most cases, says co-signed loans are issued by private lenders and your options for re-payment are much more limited.

If you have more than one student loan, beware of offers to “re-package” them into a single monthly payment, generally with a private lender. “That might lower your payments,” says Sullivan, “but your total costs actually go up because the interest rate could be higher or the pay-off period longer.   In addition, if you convert a Department of Education loan to a private one, you lose the pay-off options the federal government offers, such as an income-based repayment plan.

Above all, don’t make a rash decision.  “We suggest counseling,“ says  Sullivan.  Look for a non-profit organization that understands student loans. And make sure you are clear about the cost.  You should also contact the Better Business Bureau to check out the reputation of any counseling service you are considering.(1)

Oh, Just Default

If you run the numbers, Sullivan maintains that “sometimes default is a very viable option.  If your Social Security income is $1,000/month and the cheapest student loan payment you can get is $500/month, you won’t be able to pay it, anyway.”

Just keep in mind that a default ruins your credit rating, which can impact your ability to get a job or another loan.   If you apply for phone service or utilities, you might need to make a larger deposit.  On the other hand, if you’re retired and not trying to borrow money or looking for a job, this might not be a big deal.  Provided you can accept the fact that you will be “in default” literally until you die.

“Typically, it’s not your best option,” admits Sullivan, “but it’s not the end of the world.  It won’t ruin your life.  And, you are financially further ahead than if you make the $500/month payment.”

Never Co-Sign On the Dotted Line

“We recommend you don’t co-sign any loans,” says Sullivan.  Whether it’s a loan for education, a car, or a home, he maintains that co-signing is “a particularly dangerous thing to do.”  Because if there is a default, both parties will see their credit rating down-graded.  “The majority of people who co-sign loans get stuck with making the payments.”  Even if one of the borrowers dies, the loan lives on; the lender just comes after the other person.

“Take Charge America” takes the position that if you co-sign a loan for a family member it usually means you cannot afford to give them the money outright.  Which is a sign that you probably can’t afford to make payments on the loan, either.

1. “Take Charge America” will provide “general information” for free.  If you want more specific advice and a recommended plan, there’s a fee of $249.

If you want to go over your re-payment options and get a recommendation for a plan: $249

You have the most flexibility if the loans were made by a federal agency.  “You really have no options for private student loans.”