Why student debt and Social Security are on a collision course

Student debt doesn't just make it harder to save for retirement. For some borrowers, it could eat into their Social Security checks.

New research shows that over the next few decades, an increasing number of Americans are likely to see some of their monthly retirement benefits withheld in order to pay off debts from their schooling. For retirees who have defaulted on federal student loans, a little-known regulation called the Treasury Offset Program allows the Department of the Treasury to redirect, or "offset," up to 15% of their Social Security benefits toward paying the government back.

Financial analysts say this is cash that many beneficiaries can't afford to lose.

"It's removing some of the money that they rely on," said Mark Kantrowitz, a student loans expert and author of several books on college financial aid. "The government is giving with one hand and taking back with the other."

Since March 2020, the U.S. government has paused all collections of defaulted federal student loans, meaning no one's Social Security check is being offset right now. But that pause is temporary. By June 30, the Department of Education has said that if a broader debt relief program has not yet been implemented, "payments will resume" 60 days later. In other words, Social Security and student debt could be on a collision course set for this August.

In the years before the pause, the amount of Social Security checks being offset rose rapidly. From 2002 to 2013, the total number of beneficiaries hit by the clawback increased fivefold, from about 31,000 to 155,000, according to the Government Accountability Office. Among those aged 65 and older, the jump was even steeper — from 6,000 to 36,000.

If offsetting resumes, only a small number of senior citizens would be vulnerable at first. But as more Americans with student debt approach retirement, that number is likely to grow. According to a study by the Center for Retirement Research at Boston College, less than five percent of current Social Security beneficiaries currently have student debt. But among future beneficiaries, that percentage is much higher. Among white Americans, for example, only 1.5% of those aged 62 and older are still paying off student loans. But for those aged 35 to 61, that number is 14.1%.

"According to our estimation, this is potentially going to be a bigger problem," said Siyan Liu, a research economist and co-author of the CRR's study. "As younger people right now — with their greater likelihood to have student debt — as they retire, they may be more likely to get trapped in this unfortunate situation of having their benefits withheld."

There's also a racial component to who would get hit the hardest. Among Black Americans, 4.4% of current Social Security recipients are still paying off student debts — almost three times the rate for white people. And among Black workers aged 35 to 61, that percentage soars to 22% — again, significantly higher than whites of the same age group.

"If the younger cohort continues to carry a lot of student debt into their retirement, because of the racial disparity, this could potentially become a source of racial inequality in retirement," Liu said.

Social Security is already in the news thanks to remarks President Joe Biden made during his State of the Union address on Feb. 7. At one point in his speech, the president said some Republicans would prefer to see the massive entitlement program "sunset" — an accusation that drew howls of protest from GOP lawmakers. Biden appeared to be referring to a proposal by Senator Rick Scott, which recommended allowing "all federal legislation" to expire in five years.

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Studies like the CRR's are a reminder that Social Security benefits, which about 49 million American retirees depend on, are also imperiled by laws already on the books. According to the Center, the average borrower who faces an offset of their Social Security loses about $2,500 per year. For a retiree living on a fixed income, that could be a substantial loss.

"We're talking about a significant number of senior citizens, and they are among the most vulnerable population," Kantrowitz said. "They may need that money to pay for food and medication and rent."

For borrowers in default, some lifelines are available. One is Fresh Start, an initiative that the Department of Education unveiled last year. Eligible debt holders can apply to have the pause on collections extended, or to rehabilitate their loans — in other words, to get them out of default and start paying them off again. For debtors fortunate enough to have a financial advisor — or a concerned relative who has one — a wealth manager can alert them to these options.

As for the Treasury Offset Program, Kantrowitz proposes a broader solution: ending it.

"I would consider the offset of Social Security benefits to be a morally bankrupt policy," he said. "It's a bookkeeping mechanism for paying off the defaulted loans that puts people's lives at stake."