Falling behind on student loans can reduce Social Security benefits by $2,500 a year

An office of the Social Security Administration in San Francisco.

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If you default on federal student loans and collect Social Security benefits, your monthly paycheck may be reduced.

Sick leave has put all the decorations away hold off for now.

But when collection ends, the reduction in annual Social Security benefits is about $2,500 on average, based on 2019 data, according to new research from the Center for Retirement Research at Boston College.

It is usually about 4% to 6% of the family’s income, a large amount that can pay off the balance of a person’s debt, the study found.

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The number of Social Security recipients in this situation is small, based on the costs of the crime. Less than 5% of beneficiaries currently have student loan debt.

But those balances are expected to be “significantly” higher for future beneficiaries, who are also expected to have higher crime rates, according to the study.

“In the minority, the group of people who hold student loans is much larger,” said Siyan Liu, economist at the Center for Retirement Research.

“If it continues in retirement, it means that a larger group of them, if they have problems paying money, may face benefits,” he said.

Social Security benefits are usually tied to withholdings after federal student loan repayments have been delayed.

The Social Security withholding amount for child debtors is usually 15% of the monthly benefit amount or the greater of $750 per month – whichever is less.

“It’s a real problem for people who have a fixed income and don’t have any other help,” said Adam Minsky, a Boston-based attorney who specializes in student loan law.

“That 15% can make the difference between being able to pay rent or food or medicine,” Minsky said.

The suspension of Social Security benefits usually occurs after 425 days have passed and the debtor is no longer able to make repayments.

The amount withheld is based on federal loan balances.

How much money is at stake

About 2.7 million consumers age 62 and older owed more than $107.3 billion in federal loans as of September, according to the US Department of Education.

The average annual Social Security benefit at risk because of student loan default should increase to $2,594 in the future for those now 35 to 61 — up from $2,299 for current residents age 62 and older, based on 2019 data, according to the Center for Retirement Research.

However, the share of household income at risk is expected to fall to 4.4% for future beneficiaries, down from 6.1% for those who receive it now.

Beneficiaries today who are behind on federal student loans cannot keep benefits because of those collections. suspended as part of the student loan moratorium that began in March 2020, Minsky said.

“No one is doing their security checks right now,” Minsky said.

President Joe Biden New Start plan It plans to give borrowers a full year after the payment freeze to try to get out of default before benefits are collected again. to mention.

How debt is affected

Biden suggested public student loan forgiveness up to $10,000 for federal student loans, or up to $20,000 for Pell recipients.

The outcome of the plan is now in the hands of the US Supreme Court, which planned to evaluate in February.

If the plan goes through, it will provide an average forgiveness of $12,000 per borrower, according to the Center for Retirement Research.

Black and Hispanic families, who are more likely to receive Pell money, will cut their share of borrowers in half, the study found. The share of Black borrowers will be reduced to 12% from 22%.

But future recipients in those groups are expected to see their delinquencies rise, according to the Center for Retirement Research.

This plan will also have a significant impact on delinquency rates, as borrowers can have their entire balance forgiven.

While Black borrowers stand to see a significant reduction in delinquency rates, Hispanic borrowers will see an even greater reduction, the study found.

Because Biden’s plan will reduce debt and delinquency for future retirees, it will also reduce racial inequality, the Center for Retirement Research said.

Some Democratic politicians are also looking at another way to get relief.

In December, four House Democrats introduced a bill, the Student Loan Relief for Medicare and Social Security Recipients Actit will eliminate student loan balances held for more than 20 years by Medicare and Social Security beneficiaries.

It remains to be seen whether the proposal can gain traction on Capitol Hill.

“We need to eliminate as much student debt as possible for everyone, but especially for those who have spent years of their lives working to pay it off,” said Rep. Adam Schiff, D-Calif., in a statement. “This bill will ensure that instead of cutting their benefits, seniors and people with disabilities can focus more on their health, their families, and living their best years. “

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