A recent study of college debt among retirees showed an increasing trend of Social Security benefits being withheld to cover delinquent loans, with the population of those affected growing 540% from 2002 to 2015, according to the Center for Retirement Research at Boston College.

And while the actual numbers were relatively small—the jump was from 5,977 retirees whose benefits were reduced in 2002 to 38,249 in 2015—the trend is alarming, especially since delinquency rates are increasing among student loan borrowers, “surpassing all other types of consumer debt between 2012 and early 2020,” the researchers found.

Some financial advisors are already finding these retirees to be among their clients.

“The federal college loans are the only loans where if you don’t make a payment on it, they will attach your Social Security when you go to collect,” said Joseph Bogardus, a CFP at Barnum Financial Group’s Center for College Planning in Shelton, Conn., adding that the issue is a relatively new one because college used to be a lot more affordable. “But now, for the first time, those who couldn’t really afford the college they or their kid went to are having their Social Security benefits reduced. I’ve had a couple of clients already where this is the case.”

According to the Center for Retirement Research/Boston College study, student loan debt is unusual in a number of considerations that can make it more burdensome than other kinds of debt. For example, interest rates for parental student loans are high when compared with secured debt, the agency said. But more important, one distinct feature of federal student loans is that federal payments, including Social Security and disability benefits, can be withheld by the U.S. Treasury Department to pay for delinquent loans.

“Potential benefits withheld in the event of student loan delinquency can undermine the retirement security of current and future retirees and, thus, can be of primary concern to the Social Security Administration and other government agencies,” the study warned.

Older Americans can end up holding federal student loans for a variety of reasons—they could still have loans from their own college education or mid- or late-career training (some student loan terms are as long as 30 years) or they could have taken out loans on behalf of children or grandchildren through parent PLUS loans.

No matter the reason, the study found that more older Americans have outstanding student loans when they are near or in retirement than they used to, and the rate of increase for this group, the amount of their debt and the rate of delinquency are all on the rise.

Whereas less than 2% of current Social Security recipients still hold federal student loans, the average retired borrower owes more than $30,000 after originally taking out around $46,000. By the time current borrowers who are 35 years old start collecting Social Security, that rate will rise to 15%, and the outstanding loan total will be about $35,000 on original loans of about $48,000, in 2019 dollars, according to the Center for Retirement Research.

If the current trend of almost 25% of student loan borrowers in old age being delinquent holds, the withheld dollars will add up quickly. Under the current rules, the amount the Treasury can withhold is either 15% of the total monthly benefit or the amount by which the benefit exceeds $750 per month, whichever is less.  

“For an average borrower in delinquency, the financial consequences of benefits withheld appear to be relatively small,” the Center for Retirement Research study said, adding that the maximum amount of annual Social Security benefits withheld currently is around $2,300, or roughly 6% of household income.

“However, for households that are just making ends meet, even a small decline in income can have significant consequences,” the study found. “Putting these numbers into context, the amount of withheld benefits can roughly pay off the average household credit card balance in 2019.”

Even The Middle Class Could Hurt
Even families that on the surface may be solidly middle class or upper middle class may find themselves facing Social Security benefits that are lower than what they were expecting, Bogardus said.

For example, he illustrated, the average family in Fairfield, Conn., has about $250,000 to $300,000 in income, up to half a million in retirement assets, a nice house, a nice car, and very poor cash flow.

“That’s traditionally what I see,” he said. “A lot of times, they’re already overextending themselves and spending every nickel they’re making. Now on top of that, if they want to send their kid to Yale, the federal government will give them the 70 grand a year to send their kid to Yale, even though they can’t actually afford it.”

And that’s where the trouble lies.

“There’s a fundamental flaw with college in the payment aspect, in that it’s so very easy to borrow the money,” he said. “There are really no checks and balances.”

The Center for Retirement Research study also looked at the potential impact of the Biden administration’s student debt relief program, which is currently on hold. The possibilities of the program were promising: Many previously delinquent borrowers would have had their debt erased, and many others would have their debt cut in half, the study said.

The study’s findings were based on data that came from the Federal Reserve Board’s triennial “Survey of Consumer Finances,” which provides economic and financial data on American households, including data for student loans. Because the pool of retirees with student loans is still quite small, the study took sample pools from 2010, 2013, 2016 and 2019.