Is This Student Loan Debt Collection Tactic Out of Control?

Much like back taxes and delinquent child support payments, college loan debt cannot be extinguished by bankruptcy. And, much to the dismay of thousands of Americans, long-ago student debt that borrowers thought had either been paid off or forgiven is coming back to haunt them - in the form of income garnishment.

Wages and Social Security targeted

According to The Wall Street Journal , nearly 175,000 people are experiencing wage garnishment by the federal government for defaulted student loans, a 45% increase from just a decade ago. Possibly, this is due to the tightening of bankruptcy laws that occurred in 2005, making all student loans exempt from bankruptcy - unless a borrower could show undue hardship, a practically unprovable set of circumstances.

It's bad enough to suddenly have 15% of your after-tax pay taken by the government, but it isn't only working folks who are getting nabbed. Social Security recipients are also feeling the sting of those often long-forgotten loans.

For these retirees, some who are in their seventies and eighties, the situation is especially distressing: not only are they making due on less income, but the intervening years have caused their original debt to balloon, often to unmanageable amounts. In one case, a 67-year-old man saw his original debt of $3,750 increase to over $21,000 , which he is required to repay.

Boomers are in particular trouble

Baby boomers are in a real pickle, holding not only their own college debt, in many instances, but that of their children and grandchildren as well. Americans aged 60 and older hold $43 billion in unpaid student loans, and the average debt level is $20,000. That's 60% higher than just nine years ago. In 2013, 156,000 retirees had their Social Security checks garnished for unpaid student loan debt - almost as many as non-retirees. Approximately 4.7 million boomers in their fifties still owe money on college loans.

There are options

Luckily, there are some steps you can take if the government notifies you that it plans to garnish your Social Security benefits. Don't ignore the notice - you will get a 20-day window in which to request a review on the issue. You can make this request at any time, but you will be subject to garnishment in the meantime.

If you cannot get a hardship exemption, ask about an income-based repayment plan. In the past, you would have had to pay high payments for a few months after your loan came out of default, but a new law has put that onerous requirement in the past.

The new loan rehabilitation rules now clearly state that the government can take 15% of the amount that your adjusted gross income exceeds your state's poverty level. For many retirees on Social Security, that number may be zero, which means you will only have to pay a $5 per month minimum on your debt.

Remember that, for non-tax debt, the first $750 of monthly Social Security income is exempt, so you will never receive a check lower than that amount due to government garnishment. These rules pertain only to federal student loans; private lenders cannot touch your benefits.

In spite of the apparent heartlessness of the government toward retirees, there is little likelihood that federal student debt will ever be dischargeable like other forms of debt, since the programs are taxpayer-supported.

The new rules take into consideration the lower income of retirees, however - so taking advantage of these repayment options can, at least, make the debt less onerous for those least able to pay.

Student loan debt surges for senior citizens

When they should be worrying about affording retirement, a growing number of senior citizens are drowning in student loan debt instead.

Between 2005 and 2013, student loan debt among seniors 65 and older rose by more than 600% from $2.8 billion to $18 billion, according to a new report from the Government Accountability Office.Out of all student debt holders, seniors still account for a small percentage. But their ranks are growing rapidly -- quadrupling in size since 2004 to 706,000 households.

While the majority of debt, about 80%, owed by seniors comes from loans taken out to fund their own college educations, 20% of loans were taken out for a child or dependent, according to the GAO report.

At age 57, Rosemary Anderson is approaching retirement age with $152,000 in student loan debt.

Twenty years ago, she took out $65,000 in loans in order to pay for her bachelor's and master's degrees. But after getting divorced, losing her job and caring for her sick brother, she basically gave up on making payments. She was hit hard by interest and penalties and the amount she owes has since climbed by tens of thousands of dollars.

40 million Americans now have student loan debt.

CNNMoney profiled Anderson last month, and she testified at a congressional hearing about older Americans with student debt on Wednesday.

"I will be indebted for life," Anderson said in her testimony. "I find it very ironic that I incurred this debt as a way to improve my life, and yet I sit here today because the debt has become my undoing."

Default rates have also been rising with a debtor's age, the report found. While only 12% of federal student loans belonging to people ages 25 to 49 were in default in 2013, that rate spiked to 27% for Americans between 65 and 74 years old, and to more than 50% for people 75 and older.

Retirees' Social Security checks garnished for student loans.

Failing to pay back these loans can have dire consequences. Lenders will even take a bite out of Social Security payments to get the money they're owed.

Last year, 156,000 Americans had their Social Security benefits garnished because they had student loans that were in default, according to analysis conducted by the U.S. Treasury for CNNMoney. That's triple the 47,500 people who had payments garnished in 2006.

"Some may think of student loan debt as just a young person's problem," said Senate Special Committee on Aging Chairman Bill Nelson. "Well, as it turns out, that's increasingly not the case."

How to Avoid Losing Social Security to Student Loans

Much like unemployment isn’t going to get you out of repaying student loans, retirement isn’t going to, either. Social Security recipients – whether they’re retired or disabled – can have up to 15% of their checks taken for defaulted federal student loans, and it’s a common problem.

Joshua Cohen, a consumer law attorney who bills himself as The Student Loan Lawyer, says he hears from someone in this situation about every two weeks. He’s received a steady flow of clients losing Social Security to student loan payments since he started practicing in 2008.

“A majority of them are for parent PLUS loans,” Cohen said. “Nobody told them about affordable repayments, and there’s a sizable number of boomers and others who were forced into retirement earlier than they expected because of the downturn.”

He remembers the first client he encountered with this issue: A retired truck driver came to him after his Social Security checks came in smaller than usual, and Cohen helped him consolidate his loans to emerge from default. He then entered an income-contingent repayment plan of $5 a month, eliminating the offset from his Social Security payout.

This applies to any loan situation: When you realize you can’t afford the payments, act immediately. Student loans offer a variety of repayment options allowing borrowers to lower their monthly payments, and contacting your loan servicer to work out an affordable payment should be your first step.

“If that doesn’t work, the Department of Education has an ombudsman you can contact, and if that fails, contact a lawyer,” Cohen said. “When contacting the ombudsman, there’s no harm in contacting the CFPB (Consumer Financial Protection Bureau), because it has jurisdiction over student loans.”

Letting unaffordable loan payments go unaddressed is a near-certain route to default, which can seriously damage your credit, not to mention the potential wage garnishment (or Social Security offset). That path only holds more trouble.

“For a lot of my folks, they are barely surviving to begin with,” Cohen said. “They have credit card debt, because that’s how they’re charging their prescriptions. The Social Security check is their credit card payment. It could be their auto insurance if they’re still driving. It can sometimes cut into their food bill.”

Student loans have a lot of potential to damage your credit and your well-being, so prioritize your payments and take advantage of assistance programs available to you. You can see how your student loans are currently affecting your credit scores for free on Credit.com.

Don't Stress Over Student Loans

The most straightforward repayment plan for federal loans is the standard ten-year plan. Under this arrangement, you pay the same amount each month until your loan is repaid. But that can be challenging for graduates with a lot of debt or a low-paying job. Borrowers who have $30,000 or more in loans can opt for the extended-repayment plan, which lowers the monthly bill by lengthening the re­payment period to as long as 25 years. The graduated repayment plan requires lower payments at first and then raises them, usually every two years, for up to ten years, presumably as your income increases. (With the extended and graduated plans, you’ll pay more interest than with the standard repayment plan.)

Or check out income-based repayment plans, such as Pay As You Earn, the newest of such options.

Income-based repayment is for borrowers with a lot of debt relative to income. You qualify if you have a “partial financial hardship”—that is, your monthly payments would be higher under the ten-year standard repayment plan than under the income-based plan.

With Pay As You Earn, you must also have taken your first loan on or after October 1, 2007, and received a disbursement of at least one loan on or after October 1, 2011. You put 10% of your “discretionary” income (the amount by which your income exceeds 150% of the poverty line) toward your loans over 20 years, after which any remaining amount is forgiven.

Borrowers in income-based repayment programs who work in public-service positions—for the federal government or a qualifying nonprofit, for example—also qualify for public-serv­ice loan forgiveness; federal loans are forgiven after ten years (or 120 on-time payments) instead of 20 years.

Consolidation lets you combine your federal loans under one interest rate and one bill (you can’t consolidate federal loans with private loans). The interest rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth point. Consolidating still gives you access to the range of repayment plans.

No matter which repayment plan you choose, sign up for automatic debit. You’ll qualify for a 0.25-percentage-point reduction on your federal interest rate.

Among graduates of the class of 2012 who borrowed, the average debt is $29,400—not a crippling amount, but no easy lift, either. Many graduates have a mix of federal loans at a variety of interest rates (federal Direct Loans, the most widely available, carried a 3.86% rate for the 2013–14 school year), and some borrowers also have private loans with variable rates as high as 11%. You can pick a repayment plan that fits your finances; if your circumstances change, you can always change the plan. (See which best fits your budget with the Department of Education's Repayment Estimator.)

The most straightforward repayment plan for federal loans is the standard ten-year plan. Under this arrangement, you pay the same amount each month until your loan is repaid. But that can be challenging for graduates with a lot of debt or a low-paying job. Borrowers who have $30,000 or more in loans can opt for the extended-repayment plan, which lowers the monthly bill by lengthening the re­payment period to as long as 25 years. The graduated repayment plan requires lower payments at first and then raises them, usually every two years, for up to ten years, presumably as your income increases. (With the extended and graduated plans, you’ll pay more interest than with the standard repayment plan.)

Or check out income-based repayment plans, such as Pay As You Earn, the newest of such options. Income-based repayment is for borrowers with a lot of debt relative to income. You qualify if you have a “partial financial hardship”—that is, your monthly payments would be higher under the ten-year standard repayment plan than under the income-based plan.

With Pay As You Earn, you must also have taken your first loan on or after October 1, 2007, and received a disbursement of at least one loan on or after October 1, 2011. You put 10% of your “discretionary” income (the amount by which your income exceeds 150% of the poverty line) toward your loans over 20 years, after which any remaining amount is forgiven.

Borrowers in income-based repayment programs who work in public-service positions—for the federal government or a qualifying nonprofit, for example—also qualify for public-serv­ice loan forgiveness; federal loans are forgiven after ten years (or 120 on-time payments) instead of 20 years.

Consolidation lets you combine your federal loans under one interest rate and one bill (you can’t consolidate federal loans with private loans). The interest rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth point. Consolidating still gives you access to the range of repayment plans.

No matter which repayment plan you choose, sign up for automatic debit. You’ll qualify for a 0.25-percentage-point reduction on your federal interest rate.

If you drop out of the program, you lose the benefit. Take the TEACH grant, which awards up to $4,000 annually to students who agree to work four years in high-need teaching positions, such as science and special education, in low-income areas. If you don’t complete your service, the grant converts to an unsubsidized Federal Direct Loan, or Stafford.

That means you will repay every dime of the grant at 6.8% interest starting from the day you received the award. And if you declined a subsidized Stafford loan—with a current rate of 3.4%—to accept a TEACH grant, you lose twice because the grant converts to the higher rate.

Some organizations, including AmeriCorps and Teach for America, offer grants after service is completed. Your federal loans go into forbearance during that time, meaning interest continues to add up. If you complete your service, the government will pay some or all of the interest, but you’ll pay it—on top of your loans—if you don’t.

The Peace Corps forgives 15% of Perkins loans for each of your first two years of serv­ice and 20% for each of the next two, capping the forgiven amount at 70% of your combined loans. That’s helpful, but only if you’re willing to commit to several years of hard work for minimal pay—and only if you have Perkins loans to begin with.

AmeriCorps and Teach for America offer more flexibility. Volunteers are eligible for the Segal AmeriCorps Education award, tied to the Pell amount ($5,550 in 2012). To receive the award, members must generally complete their term of service—for AmeriCorps, typically 1,700 hours; for Teach for America, about one year. Two terms of service earn you the maximum amount of $11,100 (in 2012). But bowing out early for eligible reasons, such as serious illness, may qualify you for a prorated payout.

The Public Service Loan Forgiveness program also rewards service. If you work in the public sector—say, in public health or at a public school—the PSLF program forgives the remainder of your student loans after 120 on-time payments while you’re employed in the public sector.

The catch? To benefit from the program, you must also qualify for an income-based repayment plan, which reduces your monthly bill below what it would be under a standard ten-year repayment plan. After ten years, the remaining amount is forgiven. But lower monthly bills mean the loan principal stays larger longer and accumulates more interest. If you drop out of the public sector before making 120 payments, you’ll end up losing the forgiveness and paying more than if you had paid over ten years.

Your program may not last. The dependence of volunteer programs on congressional funds means that you pin your chances of loan forgiveness on Washington politics. For instance, funding for AmeriCorps was briefly on the chopping block in 2011, during the debt-ceiling debate.

And at just five years old, the PSLF program hasn’t yet forgiven anyone’s federal student loans. The first beneficiaries will emerge in 2017, giving Congress plenty of time to impose new restrictions or even eliminate the program.

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.

What You Should Know About Student Loan Forgiveness Programs

Two-thirds of students who receive bachelor's degrees leave college with debt in tow. Depending on the amount owed (the average among borrowers is $26,600), it can take decades to pay off the outstanding balance.

For help with paying down your student loans more aggressively, consider the many programs that reduce your debt in exchange for relocating to specific regions and/or providing needed services in underserved communities. From Kansas to Chad, and in fields from nursing to teaching, there are programs to help graduates slash college debt. But the programs aren’t always easy to get into -- nor easy to stick with. Here are nine things you should know:

1. There are two broad categories of loan-forgiveness programs. You can enroll in the federal government's Public Service Loan Forgiveness program and/or apply for a loan repayment assistance program (LRAP) run by an organization or state. Know the differences: Public Service Loan Forgiveness requires you to make ten years of monthly payments toward your loan via an income-based repayment plan while working in a qualified public-service job before the remaining balance will be canceled or "forgiven." To qualify for one of the income-based repayment plans, you must have high debt relative to your income.

An LRAP, in contrast, tends to require dedicated service to a specific organization for a relatively short period of time in exchange for a limited amount of loan forgiveness.

2. You can double-dip. You can join an LRAP such as AmeriCorps or the Peace Corps and receive loan-forgiveness benefits at the end of your program (after one year for AmeriCorps, two for the Peace Corps), and you can count your time as eligible employment toward the ten-year public-service requirement for the federal government's Public Service Loan Forgiveness.

3. Only federal loans are eligible for forgiveness in most of these programs. Few programs allow their money to go toward private loans.

4. You should apply early. Start assessing programs before the beginning of your senior year. Deadlines vary, but Teach for America accepts submissions through February 20, and the rolling application process for AmeriCorps takes about six months. The Peace Corps requires more records and medical clearance, so aim to submit your application seven to 12 months before you hope to start working.

5. It's a big commitment. In most of these programs, you'll spend two years working to serve the greater good -- teaching in Detroit's struggling schools, improving agricultural practices in Senegal or providing mental-health services in rural Minnesota. Some programs, such as AmeriCorps Vista and the Peace Corps, explicitly prohibit you from holding another job while you participate in the program. Usually, you'll have the option to extend your work in the program beyond the two-year term, which tends to reap even more loan-repayment help.

6. Yes, you'll earn a salary. In addition to the partial (or sometimes full) payoff of your loans, most LRAPs provide a small stipend (Teach for America is the highest, with a maximum salary of $51,000) and health benefits.

7. There’s no partial credit. If you don't fulfill the entire commitment, you won't earn any money toward paying off your student loans. You might even face penalties from employers such as the National Institutes of Health research program and Nurse Corps if you breach your contract. In 2010, 12.4% of TFA teachers left the program after the first year.

8. You'll pay taxes on the loan-forgiveness awards. AmeriCorps, for instance, awards a lump sum equal to the largest Pell Grant you could receive ($5,645 in 2013). You won't actually receive a check, but you can make payments toward your loan directly from your profile on the AmeriCorps Web site. You have seven years to apply the award. Any amount you use is considered taxable income that year. For example, a young adult in the 15% tax bracket who applies $5,645 in loan-forgiveness awards toward a loan will trigger $847 in taxes due the following spring.

9. You may not get accepted. Most programs accept only 15% to 30% of their applicants, with Teach for America and the Nurse Corps Scholarship Program taking even fewer candidates. Other programs aren't as restrictive: Kansas's Rural Opportunity Zones relocation program, for example, awards a maximum of $15,000 for living in one of 50 rural counties for five years and simply requests proof of a degree from an accredited college or university and an outstanding student-loan balance.

The Growing Consensus on Fixing Student Loans 

Sixty percent of graduates from the class of 2011-12 entered the real world with student-loan debt -- having borrowed $26,500, on average.

That's not small change, especially when you consider that interest charges will add thousands to debt payments over the life of the loans. It pays -- literally -- to understand your payment options.n

Repayment is a mountain you can climb, with the right guide. Here are seven things that can help (or maybe hinder) your debt repayment:

1) You can cut the interest rate on your federal student loans by 0.25 percentage points immediately with one simple step. Sign up to make your monthly loan payments via automatic debit, and your interest rate drops. It's that easy.

2) You can extend your repayment period on your federal loans. Borrowers who have $30,000 or more in federal loans can choose the extended repayment plan, which lowers your monthly bill by lengthening the repayment period to as long as 25 years.

3) You can make smaller federal student-loan payments -- and even have some of your debt forgiven -- if you don't earn much money. Income-based repayment plans, such as Pay As You Earn, are available for borrowers who have a lot of debt relative to income. The plans allow you to put 10% of your "discretionary" income (the amount by which your income exceeds 150% of the poverty line) toward your loans over 20 years, after which any remaining amount is forgiven.

4) Dropping out of your repayment program could cost you. For example, consider the federal TEACH grant, which provides up to $4,000 for those who commit to teaching low-income students in high-need fields for at least four years. If you don't complete your service, the grant converts to an unsubsidized Federal Direct Loan, or Stafford. That means you will repay every dime of the grant with interest starting from the day you received the award. And if you decline a subsidized Stafford loan -- with a current rate of 4.66% -- to accept a TEACH grant, you lose twice because the grant converts to the higher rate.

5) Small towns can offer big debt relief. For example, in exchange for moving to one of 77 rural counties in Kansas, recent college grads receive up to $3,000 per year (for a maximum of five years) to help pay back loans. Other struggling regions are following suit.

6) You'll pay taxes on loan-forgiveness awards from those Kansas counties or from organizations such as the Peace Corps and AmeriCorps. For example, a young adult in the 15% tax bracket who applies $5,645 in loan-forgiveness awards toward a loan will trigger $847 in taxes due the following spring.

7) Interest rates on some of your subsidized Staffords may kick in sooner than you think. Until recently interest was deferred during the six-month grace period that new grads have before they must start repaying student loans. But for loans issued between July 1, 2012, and July 1, 2014, interest starts accruing the moment grads hit the real world. This year's crop of grads will likely have a combination of loans that gain interest during the grace period and those that don't.

Student Loan Rates Inch Up

First, the bad news: Federal student loans are more expensive this year. Undergraduate Stafford loans disbursed after July 1, 2014, carry a 4.66% interest rate, up from 3.86%. Rates on Staffords for graduate and professional students are now 6.21%, and PLUS loans for graduates and parents now charge 7.21%. But there’s good news: The hikes are manageable.

Valerie Cathcart, a rising senior at Marymount Manhattan College, in New York City, isn’t too worried. She borrowed $6,500 in unsubsidized Stafford loans last year (the loans accrue interest while students are still in school) and plans to take out $7,500 (the maximum for dependent undergraduate third years and above) this year. But the higher rate will add only about $3 per month to a $7,500 loan, or about $345 over a standard ten-year repayment period. And last year’s debt will remain at the old rate of 3.86%—no retroactive rate change there. “I’m just happy that it’s happening my last year of college,” says Cathcart.

Borrowers can’t dodge higher rates, but they can borrow wisely. Reduce the need for loans by tapping savings, working part-time and cutting your cost of living. After graduation, sign up for automatic debits to repay your loans, which will cut your interest rate by 0.25 percentage point. Avoid private loans. Their rates are typically variable, and the loans don’t offer the same protections as federal debt.

Among graduates of the class of 2012 who borrowed, the average debt is $29,400—not a crippling amount, but no easy lift, either. Many graduates have a mix of federal loans at a variety of interest rates (federal Direct Loans, the most widely available, carried a 3.86% rate for the 2013–14 school year), and some borrowers also have private loans with variable rates as high as 11%. You can pick a repayment plan that fits your finances; if your circumstances change, you can always change the plan. (See which best fits your budget with the Department of Education's Repayment Estimator.)