Can Defaulting on a Student Loan Reduce Social Security Benefits?

If you borrow for college with federal student loans and you fail to repay them, you should know that the federal government may reduce your annual Social Security income by an average of $2,500. We say “may” because there are scenarios where you can have federal student loans discharged due to disability without impacting your federal benefits payments.

While defaulting on private student loans won’t result in a loss of Social Security income, private student loan companies can sue you and get their money back that way. This guide goes over how defaulting on student loans can impact your retirement and steps that you can take to avoid student loan garnishment completely.

Key Takeaways

  • If you default on your student loans, your wages can be garnished, your Social Security benefits can be reduced, and a range of other consequences can come into play.
  • Generally speaking, up to 15% of your Social Security income can be garnished through a process called Treasury Offset.
  • You can avoid losing out on federal benefits by getting back on track with student loan payments and staying up to date.

How Student Loan Default Affects Your Social Security Benefits

When you default on federal student loans, you should know the government will find a way to get their money back and make your finances much more difficult to manage until they do. For example, you can get sued and have your wages garnished at work—but that’s far from the extent of it.

According to the U.S. Department of Education, defaulting on student loans can also lead you to have your tax refunds and federal benefits payments (like Social Security payments) withheld and applied to your defaulted loans through a process called Treasury Offset.

According to Federal Student Aid, you’ll get a notice of the intent to offset at your last known address once the offset is scheduled to begin in 65 days. This garnishment will take place from there until your unpaid debts are entirely paid off or until the default status on your federal student loans has been removed.

Social Security Garnishment Limit

Fortunately, there is a limit on how much of your Social Security payments the federal government can seize through Treasury Offset.

This limit is set at 15% of your federal benefits payments, which the Center for Retirement Research at Boston College believes could leave current and future retirees with 4% to 6% less in retirement income than they would otherwise have.

How to Stop Social Security Garnishment for Student Loans

According to the U.S. Department of Education, borrowers have the option of entering into a repayment agreement to stop garnishment of Social Security payments due to nonpayment of federal student loans, as long as a first payment is made within 65 days and regularly scheduled payments are made thereafter.

If your federal student loans are in default but you have not yet received a 65-day notice letter for Social Security payment garnishment, you can also look into the Fresh Start program to help you get your loan payments back on track. This U.S. Department of Education program lets you get your defaulted loans back into “in repayment” status and removes the default record from your credit reports.

You can also get access to federal student aid benefits again through this program, but you’ll only continue qualifying if you make agreed-upon payments on your federal student loans.

How to Request Social Security Garnishment Hardship

The U.S. Department of Education says you have the legal right to request a review of your account to prevent the Treasury Offset from occurring. According to Tate Law, this could be an option if your income is low and you’re living near the poverty line.

Tate Law suggests finding out whether your loan is with the Education Department or a guaranty agency by calling the Default Resolution Group at 1-800-621-3115. From there, you can request a hardship packet that lets you apply for an exception based on your financial status. Once you complete the hardship application and submit proof of household income and expenses along with a copy of the notice of the offset, you will typically hear back with a decision within six to eight weeks.

Can you collect Social Security if you owe student loans?

You can collect federal benefits if you have student loans, and your payments won’t be impacted at all if your student loan payments are up to date. The problem occurs when your student loans are in default and you get notification of an upcoming Treasury Offset. 

Do I have to pay student loans if I am on Social Security?

You have to pay student loans regardless of how old you are when you have this type of debt, even if you’re retired and on Social security.

Is Social Security considered income for student loans?

Some Social Security payments count as income when determining student loan payments on income-driven repayment (IDR) plans, whereas others do not. The U.S. Department of Education says taxable Social Security payments are the ones most likely to be counted as income.

Can student loans be forgiven if in default?

Student loan repayment plans that lead to forgiveness, including income-driven repayment (IDR) plans, require your loan payments to be up to date to qualify.

What can happen if you default on your student loan?

If you default on federal student loan payments, a range of consequences can take place. For example, the entire balance of your loan becomes immediately due through a process called acceleration, and you lose eligibility for federal student aid. Your wages and federal benefits can be withheld, your credit score can be damaged, and the loan company can take you to court.

The Bottom Line

Not paying your student loans won’t end well, and that is especially true if you never have any plans to get back on track. You could not only suffer damage to your credit score and wages at your job being withheld but also have your future Social Security benefits garnished.

The obvious answer to this issue is staying on track with student loan payments to avoid all the mayhem that ensues when you don’t. 

Fortunately, there are loan repayment plans that can benefit borrowers with a low income. In fact, income-driven repayment (IDR) plans for federal student loans can come with a monthly payment as low as $0 for those who qualify.

Article Sources
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  1. Center for Retirement Research at Boston College. “How Do Unpaid Student Loans Impact Social Security Benefits?

  2. Social Security Administration, Frequently Asked Questions. “If My Federal Student Loan Is Discharged Because I Am Disabled, Will It Affect My Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) Benefits?

  3. U.S. Department of the Treasury, Bureau of the Fiscal Service. “Fact Sheet: Treasury Offset Program: Summary of Program Rules and Requirements.”

  4. Federal Student Aid. “Student Loan Delinquency and Default.”

  5. Federal Student Aid. “Collections on Defaulted Loans.”

  6. Federal Student Aid. “Get Out of Default with Fresh Start.”

  7. Tate Law. “Can Social Security Be Garnished for Student Loans?

  8. Federal Student Aid. “Does Social Security Count as Income for an Income-Driven Repayment (IDR) Plan?

  9. Federal Student Aid. “If Your Federal Student Loan Payments Are High Compared to Your Income, You May Want to Repay Your Loans Under an Income-Driven Repayment Plan.

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