Older Student Loan Borrowers Who Default May Face Reduction in Social Security Benefits

By Rachel Fenton

In December, the Government Accountability Office (GAO) released Social Security Offsets: Improvements to Program Design Could Better Assist Older Student Loan Borrowers with Obtaining Permitted Relief.  This study examined the increasing numbers of borrowers age 50 and older who have defaulted on their federal student loans.  For some of these borrowers, the federal government withholds (or offsets) up to 15 percent of the borrower’s Social Security benefits to repay federal student loan debt.

Highlights and recommendations from the study are below.

  • Older student loan borrowers tend to default at a higher rate than younger student loan borrowers. In fiscal year 2015, of the 6.3 million borrowers age 50 to 64, 29 percent were in default and, of the 870,000 borrowers age 65 and older, 37 percent were in default.  In contrast, of the 37.4 million borrowers younger than age 50, 17 percent were in default.
  • The number of borrowers (of any age) that had their Social Security benefits offset to repay defaulted federal student loans increased from 36,000 in fiscal year 2002 to 173,000 in fiscal year 2015 (including about 114,000 borrowers age 50 and older).
  • Nearly 70 percent of defaulted borrowers (of any age) subject to a Social Security benefit offset received disability benefits, including 80 percent of those age 50 to 64.
    • These borrowers may be eligible to discharge their federal student debt through a Total and Permanent Disability (TPD) discharge.
  • Borrowers age 50 years old or older with a Social Security benefit offset between fiscal years 2002 through 2015 showed the following characteristics:
    • About 43 percent had their student loans for 20 years or more and about 80 percent had their loans for 10 years or more;
    • About 60 percent took out the federal student loans subject to the offset in their 30s and 40s;
    • About 75 percent owed for only their education (with the remainder holding PLUS Loans for their children);
    • Most borrowers owed less than $10,000 in defaulted federal student loans at the time of their first offset; and
    • The typical monthly offset was $140, with almost half of borrowers having the maximum possible offset.
  • An increasing number of older borrowers with Social Security benefit offsets may experience financial hardship since the offset threshold was established nearly 20 years ago, and it is not adjusted for increases in cost of living.
  • More than 70 percent of the loan repayments collected through Social Security offsets are applied to fees and interest (12% to fees and 59% to interest), with only 28 percent applied to the loan principal.
  • Starting in 2015, the Department of Education linked its student loan data with Social Security data to identify about 387,000 borrowers (of all ages) who receive Social Security disability benefits and may be eligible for a TPD discharge.
    • In April 2016, the Department of Education suspended Social Security offsets for borrowers identified as eligible for a TPD through data matching. However, the loan of a borrower who has not received a TPD discharge will remain in defaulted status and interest will continue to accrue.  This becomes especially problematic when a disabled borrower reaches full retirement age (currently age 66) since Social Security benefit offsets would resume if the loan debt has not been discharged.
  • GAO suggested that Congress adjust the Social Security offset threshold to reflect the increased cost of living. GAO also made five recommendations to the Department of Education, including that it streamline the Total and Permanent Disability discharge application process and related recertification requirements and provide information on its website about a currently available financial hardship exemption.