3 Ways Federal Student Loans Can Impact Your Retirement

While many Americans retire decades after they take their final college exam, the financial affects of student debt can linger for years.

According to a new article in U.S. News and World Report, the outstanding federal student loans held by people ages 65 and older increased from $2.8 billion in 2005 to $18.2 billion in 2013. Now, more than 700,000 senior citizen households carry student loans, which can have a major impact on their retirement.

Here are three ways that student loans can affect retirement:

Withheld Government Benefits

While fewer senior citizens have student debt than younger graduates – around 4 percent of senior citizen households have outstanding student loans – older borrowers are much more likely to have defaulted. A little more than a quarter of people between ages 65 and 74 have federal student loans in default, and half of people ages 75 with federal student loans are in default.

After a loan has been delinquent for 425 days, the U.S. Department of Education can start collecting through a number of means, including garnishing wages and withholding payments of tax refunds, survivor benefits, Social Security, and disability benefits.

While federal law sets limits on how much the government can withhold from Social Security checks to pay down federal student loan debt, the deduction can be significant for retirees on a low or fixed income. As much as 15 percent of Social Security benefits can be withheld if the total benefit is more than $750 per month. For someone collecting $1,200 a month, for example, that means $180 would be withheld. That could increase in coming years because the limit for monthly Social Security offsets has not been updated since 1998.

"This creates the potential for an unpleasant surprise for some, as their benefits are offset and they face the possibility of a less secure retirement," according to information a U.S. Government Office of Accountability analysis of Survey of Consumer Finances data.

In 2002, the U.S. Treasury collected around $24 million in withheld Social Security benefits to pay off federal student loans, and in 2013 that amount increased to $150 million.

Small Payments

Some students may have opted for small payments over a long period on their federal student loans, which can stretch out the payments for many years. Others may rack up fees and interest on late payments or initiated loans later when they went back to school in middle age. Federal student loan debt typically is not erased in bankruptcy, so borrowers must pay it off, no matter how long it takes. Senior citizens with unpaid federal student loan debt must factor in payments into their retirement budget.

While some senior citizens' student loan debt comes from cosigning on their children's loans, the majority of the debt is from their own education.

Nonpayment Fees

Unpaid loans can linger for decades, and every year that goes by with a nonpayment, underpayment, or offset of a government benefit can mean additional fees for the borrower. In fiscal year 2014, for example, the U.S. Treasury charged a $15 fee per offset of government benefits to pay off a federal student loan.

There is no way to get around federal student loan debt, and retirees should make it a priority to pay off old student loans as quickly as possible so that they can maximize their government benefits. For students who are considering taking out loans to pay for college, making good decisions now can positively affect their retirement years down the road.

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