Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Retirees
Released: 2014-09-10T00:00:00

Letter

Background

Since passage of the Higher Education Act of 1965, a broad array of federal student aid programs, including loan programs, have been available to help students finance the cost of postsecondary education. Currently, several types of federal student loans administered by Education make up the largest portion of student loans in the United States. Four types of federal student loans are available to borrowers and have features that make them attractive for financing higher education. For example, borrowers are not required to begin repaying most federal student loans until after graduation or when their enrollment status significantly changes. Further, interest rates on federal student loans are generally lower than other financing alternatives, and the programs offer repayment flexibilities if borrowers are unable to meet scheduled payments. As outlined in table 1, the four federal loan programs differ in that interest rates may or may not be subsidized based on the borrower’s financial need, loans may be designed to specifically serve undergraduate or graduate and professional students, and loans may serve to consolidate and extend the payment term of multiple federal student loans.

Education administers federal student loans and is generally responsible for, among other duties, disbursing, reconciling, and accounting for student loans and other student aid, and tracking loan repayment. Although no other federal agencies have a direct role in administering student loans, other agencies may become involved in the event that a borrower fails to make repayment. For example, Education may coordinate with Treasury to withhold a portion of federal payments to borrowers who have not made scheduled loan repayments. Such payment withholding, known as administrative offset, can affect payments to individuals by various federal agencies. Offsets of income tax refunds would involve the Internal Revenue Service and offsets of Social Security retirement or disability benefits would involve the Social Security Administration.

Student loans are also available from private lenders, such as banks and credit unions. Private loans differ from federal loans in that they may require repayment to begin while the student is still in school, they generally have higher interest rates, and the rates may be variable as opposed to fixed. Unlike federal student loans, private student loans may be more difficult to obtain for some potential borrowers because they may require an established credit record and the cost of the loan may depend on the borrower’s credit score. Private student loans are a relatively small part of the student loan market, accounting for 10 to 15 percent of outstanding student loan debt—about $150 billion—as of January 2012.

Older Americans—that is, Americans in or approaching retirement—may hold student loans for a number of reasons. For example, because such loans may have a 10- to 25-year repayment horizon, older Americans may still be paying off student loan debt that they accrued when they were much younger. They may also have accrued student loan debt in the course of mid- or late-career re-training and education. In addition, they may be holding loans taken out for the education of their children, either through co-signing or through Parent PLUS loans.

Relatively Few Households Headed by Individuals 65 and Over Hold Student Loan Debt, but the Amount They Owe May Be Significant

According to the 2010 SCF, households headed by older individuals are much less likely than those headed by younger individuals to hold student loan debt. As of 2010, about 3 percent of surveyed households headed by people 65 and older—representing approximately 706,000 households—reported some student loan debt. This compares to 24 percent for households headed by those under 65—representing about 22 million households. The decrease in the incidence of student loan debt is even more marked for households headed by the oldest individuals—only 1 percent of those aged 75 or over reported such debt. Although few older Americans have student debt, a majority of households headed by those 65 and older reported having some kind of debt, most commonly home mortgage debt, followed by credit card and vehicle debt. While the incidence of all debt types declines for households headed by those 65 and over, the incidence of student loan debt declines at a much faster rate. For example, the incidence of student loan debt for the 65-74 age group is less than half of that for the 55-64 age group—4 percent compared to 9 percent. In contrast, the incidence of any type of debt for the older age group is only about 17 percent less than the younger age group—65 percent compared to 78 percent.

While relatively few older Americans have student debt, data from the SCF suggest that the size of such debt among older Americans may be comparable to that of younger age groups. Among all age groups, the median balances of student and other types of debt are dwarfed by median balances of home mortgage debt. Estimates of median student debt balances for the various age groups range from about $11,400 to about $15,500. Median mortgage debt, in contrast, ranges from about $58,000 to $136,000 among the same groups. Among households headed by those 65 and older, the estimated median student debt was about $12,000, and among those 64 and younger, about $13,000. However, given the small number of older households with student loans, it is important to note that the estimate of student debt for the 65 and older age category is a general approximation.

From 2004 to 2010, an increasing percentage of households in all SCF age groups have taken on student loan debt (see fig. 1). During the same period, the percentage of households headed by individuals 65 to 74 who had some student loan debt increased from just under 1 percent in 2004 to about 4 percent in 2010—more than a four-fold increase. The percentage of households having student loan debt in the two youngest age household categories—those 18 to 34 and those 35 to 44—were and remain much larger. Their rate of increase in that type of debt from 2004 to 2010 was comparatively modest—about 40 percent and 80 percent, respectively.

Data from Education’s NSLDS also indicates substantial growth in aggregate federal student loan balances among individuals in all age groups, especially older Americans. Aggregate federal student loan debt levels more than doubled overall, rising from slightly more than $400 billion in 2005 to more than $1 trillion dollars in 2013 (see fig. 2). The total outstanding student debt for those 65 and older was and remains a small fraction of total outstanding federal student debt. However, debt for this age group grew at a much faster pace—from about $2.8 billion in 2005 to about $18.2 billion in 2013, more than a six-fold increase.

Although the Direct PLUS Loan program offers parents of dependent undergraduate students the opportunity to borrow to finance their children’s education, data from Education suggests that most federal student loan debt held by older Americans was not incurred on behalf of dependents, but primarily for their own education. About 27 percent of loan balances held by the 50 to 64 age group was for their children, while about 73 percent was for the borrower’s own education (see fig. 3). For age groups 65 and over, the percentages of outstanding loan balances attributable to the borrowers’ own education are even higher. For those aged 65-74, 82 percent of the outstanding student loan balances was for the individual’s own education, and for the 75 and older group, this was true of 83 percent. Because information on the age of the loans was not readily available to us, we do not know the extent to which the debt of older Americans is attributable to recently originated loans or loans originated many years ago during their prime educational years.

Older Borrowers Hold Defaulted Federal Student Loans at a Higher Rate and Default Can Have Serious Consequences

Older Borrowers Hold Defaulted Federal Student Loans at a Higher Rate, Especially for Their Own Education

Although older borrowers hold a small portion of federal student loans, they hold defaulted loans at a higher rate than younger borrowers. Individuals 65 or older held 1 percent of outstanding federal student loans in fiscal year 2013 (see fig. 4). However, 12 percent of federal student loans held by individuals age 25 to 49 were in default, while 27 percent of loans held by individuals 65 to 74 were in default, and more than half of loans held by individuals 75 or older were in default.

According to Education data, older borrowers are in default on federal student loans for their children’s education less frequently than they are in default on federal student loans for themselves. Specifically, in fiscal year 2013, 17 percent of Parent PLUS loans held by borrowers ages 65 to 74 were in default, while 30 percent of loans for their own education were in default.

Delinquent Borrowers Have Considerable Time to Begin Repaying Federal Student Loans before Facing Collection Actions, which May Include Withholding Federal Payments

Delinquent borrowers—those who have missed one or more payments— have more than a year to resume payments or negotiate revised terms before facing collection procedures. During the initial year of delinquency for Direct Loans, Education and the loan servicers make a number of attempts to help borrowers arrange for payments and avert default (see fig. 5). After the loan has been delinquent for 425 days (approximately 14 months), Education determines whether to take actions intended to recover the money it is owed. These actions can have serious financial consequences for the borrower. For example, Education may charge collection costs up to 25 percent of the interest and principal of the loan. Interest on the debt continues to accumulate during the delinquency and default period. In addition, Education may garnish wages or initiate litigation. Education may also send the loan to a collection agency. The defaulted debt may also be reported to consumer reporting agencies, which can result in lower credit ratings for the borrower. Lower credit ratings may affect access to credit or rental property, increase interest rates on credit, affect employers’ decisions to hire, or increase insurance costs in some states.

At 425 days, Education may also begin the process to send newly defaulted loans to Treasury to recover the debt by withholding a portion of federal payments—known as offset. Federal payments subject to offset include wages for federal employees, tax refunds, and certain monthly federal benefits, such as Social Security retirement and disability payments. Each year, Education prepares a list of newly defaulted loans for Treasury offset. In 2014, newly defaulted debt must have been more than 425 days delinquent before the July deadline so that it can be sent to Treasury in December. If the debt becomes 425 days delinquent after the cutoff, it would be sent the following December (2015). Thus, the defaulted debt is sent to Treasury 3 to 15 months after 425 days of delinquency—between 17 and 29 months from the last date of payment on the loan (see fig. 6). According to Education officials, loans that have not been paid off are annually recertified as being eligible for offset.

After a defaulted loan is certified as eligible for offset to Treasury, certain payments, such as any available tax refunds, are offset immediately, without prior notice to the debtor. Borrowers with monthly benefits available for offset are informed by mail that their benefits will be offset in 60 days and again 30 days before the offset is taken, allowing borrowers an additional 2 months to resume payment on their loan before offset occurs. Treasury assesses a fee for each offset transaction, which is subtracted from the offset payment. Other federal agencies may charge additional fees for each transaction depending on the type of payment being offset. For fiscal year 2014, Treasury’s fee was $15 per offset and other agency fees were up to $27.

Federal tax refunds are the source for more than 90 percent of offset collection for federal student loan debt. Offsets from Social Security benefits represented roughly $150 million in 2013 or less than 7 percent of the more than $2.2 billion in federal payments offset by Treasury.

The number of borrowers, especially older borrowers, who have experienced offsets to Social Security retirement, survivor, or disability benefits to repay defaulted federal student loans has increased over time. In 2002, the first full year during which Social Security benefits were offset by Treasury, about 31,000 borrowers were affected. Of those borrowers, about 19 percent (6,000) were 65 or older. From 2002 through 2013, the number of borrowers whose Social Security benefits were offset has increased roughly 400 percent, and the number of borrowers 65 and over increased roughly 500 percent (see fig. 7). In 2013, Social Security benefits for about 155,000 people were offset and about 36,000 of those were 65 and over.

The majority of Social Security benefit offsets for federal student loan debt are from disability benefits rather than retirement or survivor benefits. In 2013, 70.6 percent of defaulted borrowers (105,000) whose Social Security benefits were offset received disability benefits (see fig. 8). That year, about $97 million was collected through offset from disability benefits. For borrowers 65 and over, the majority of Social Security offsets are from retirement and survivor benefits because Social Security disability benefits automatically convert to retirement benefits at the beneficiary’s full retirement age, currently 66. About 33,000 borrowers age 65 and over had Social Security retirement or survivor benefits offset in 2013 to repay defaulted federal student loans.

The amount of money collected from Social Security benefit offsets to repay defaulted federal student loans has also increased, but the average amount offset on a monthly basis per borrower has remained relatively stable. Treasury collected about $24 million in offsets from Social Security benefits in 2002, about $108 million in 2012, and about $150 million in 2013. However, over this period, the average amount offset on a monthly basis per borrower rose only slightly, from around $120 in the early 2000s to a little over $130 in 2013.

Adjusting Current Limits for Offset Can Keep Monthly Benefits Above the Poverty Threshold, but Reduce Collections to Pay Defaulted Federal Student Loans

Although there are statutory limits under the Debt Collection Improvement Act of 1996 (DCIA) on the amount that Treasury can offset from monthly federal benefits, the current limits may result in monthly benefits below the poverty threshold for certain defaulted borrowers. Social Security benefits are designed to replace, in part, the income lost due to retirement, disability, or death of the worker. The DCIA set a level of $750 per month below which monthly benefits cannot be offset. In 1998, the amount of allowable offset was effectively modified under regulations, to the lesser of 15 percent of the total benefit or the amount by which the benefit exceeds $750 per month, thus creating a standard more favorable to defaulted borrowers. For example, a borrower with a Social Security benefit of $1,000 per month would have an offset of $150, because that is the lesser of 15 percent of the benefit—$150—and the amount of the benefit over $750, which is $250. This offset would leave the borrower with a monthly benefit of $850, which is below the poverty threshold for 2013. The statutory limit of $750 for an offset was above the poverty threshold when it was set, in 1998. The offset limits have not changed since 1998, and the $750 limit represented about 81 percent of the poverty threshold for a single adult 65 and over in 2013. If the $750 limit had been indexed to the changes in the poverty threshold since 1998, in 2013 it would have increased by 43 percent or to about $1,073 (see fig. 9). Borrowers with benefits below this amount would not have been offset.

Indexing monthly benefit offset limits to the poverty threshold can prevent some older borrowers from having offsets, but would also reduce Education’s recoveries from Social Security offsets. If the offset limit had been indexed to match the rate of increase in the poverty threshold, in 2013, 68 percent of all borrowers whose Social Security benefits were offset for federal student loan debt would have kept their entire benefit, including 61 percent of borrowers 65 and older. An additional 15 percent of all borrowers and borrowers age 65 and older would have kept more of their benefits in that year. However, indexing the offset limit would have reduced the amount collected from Social Security benefits by approximately 60 percent or $94 million in 2013, representing about 4.2 percent of all dollars offset from all sources by Treasury for student loan debt in that year.

In conclusion, student loan debt and default are problems for a small percentage of older Americans. As the amount of student loan debt held by Americans age 65 and older increases, the prospect of default implies greater financial risk for those at or near retirement—especially for those dependent on Social Security. Most of the federal student loan debt held by older Americans was obtained for their own education, suggesting that it may have been held for an extended period, accumulating interest over time. The Social Security retirement or survivor benefits of about 33,000 Americans age 65 and older were reduced through offset to meet defaulted federal student loan obligations in 2013. Because the statutory limit at which monthly benefits can be offset has not been updated since it was enacted in 1998, certain defaulted borrowers with offsets are left with Social Security benefits below the poverty threshold. As the baby boomers continue to move into retirement, the number of older Americans with defaulted loans will only continue to increase. 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.

Chairman Nelson, Ranking Member Collins, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time.

GAO Contact and Staff Acknowledgments

If you or your staff have any questions about this testimony, please contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are listed in appendix II.

Appendix I: Objectives, Scope, and Methodology

To understand the extent to which older Americans have outstanding student loans and how this debt compares to other types of debt, we relied primarily on data from the Federal Reserve Board’s Survey of Consumer Finances (SCF), a survey that is conducted once every 3 years and gathers detailed information on the finances of U.S. families. SCF data is publicly available and was extracted from the Federal Reserve Board’s website. Specifically, we analyzed data from the 2004, 2007, and 2010 SCF to provide a range of information, including an overview of the percentage of families, by age of head of household, with student debt over time. An important limitation of the data is that debt, including student loans, is reported at the household level. As a result, the SCF survey responses represent the debt of the entire household, not just the head of household. Therefore, it is possible that for some households headed by older Americans, the reported student debt is actually held by children or other dependents that are still members of the household, rather than the older head of household.

The NSLDS is a comprehensive national database maintained by the Department of Education that is used to readily access student aid data and track money appropriated as aid for postsecondary students. The database includes data on the various federal student loan programs. this testimony. The NSLDS data we obtained allows us to count federal student loans and loan balances, but not the number of borrowers. Although Education maintains borrower-level data, we were only able to obtain aggregated data by loan type during the course of our analyses. These summary tables reported that about 1,000 of the more than 6 million Parent PLUS loans outstanding in fiscal year 2013 were to borrowers under the age of 25. According to Education, these cases resulted from a reporting issue where the date of birth of the Parent PLUS borrower was the reported as being the same as that of the student. We excluded these Parent PLUS loans from our analysis.

To understand the extent to which older Americans defaulted on federal student loans and the possible consequences of such a default, we relied on a number of data sources and agency documents related to federal student loans. To determine the extent to which older Americans have defaulted on federal student loans, we used data from the NSLDS summary tables we received from Education. To evaluate the consequences of default, we reviewed federal law, regulations, and agency documents describing the collection process for defaulted federal student loans, including offset of federal benefit payments through the Treasury Offset Program (TOP). We interviewed officials at Education involved in managing defaulted federal student loans, and we interviewed officials at Treasury, Education, and the Social Security Administration about the process for offsetting Social Security retirement, survivor, and disability benefits through the TOP. In addition, we interviewed Education officials and reviewed relevant documentation regarding Education’s debt collection policies and procedures; however, we did not audit their compliance with statutory requirements related to these activities.

To describe the extent of Treasury offset of Social Security Administration benefits for federal student loan debt, we used data on offset payments from the TOP for fiscal years 2001 through 2014. We assessed the reliability of this data by reviewing data documentation, conducting electronic testing on the data, and interviewing Treasury staff about the reliability of this data. Because the TOP data does not include the age of borrowers or the type of Social Security benefits that were offset, we obtained such information for relevant borrowers from the Social Security Administration’s Master Beneficiary Record using a match on Social Security numbers. We assessed the reliability of the data by reviewing data documentation, obtaining the computer code used to match borrowers to the Master Beneficiary Record, and interviewing the staff at the Social Security Administration who conducted the match. We determined that the data elements we used were sufficiently reliable for the purposes of this testimony. For about 0.25 percent of borrowers, we were unable to determine the borrower’s age, and we excluded these borrowers from age-based analyses. For about 4.3 percent of offset payments, we were unable to determine the type of benefit, and we excluded these payments from the analysis of the type of benefit that was offset. To evaluate the extent to which Social Security benefits would have been offset if the $750 limit below which benefits are not offset had been adjusted for changes in the poverty threshold, we analyzed TOP data to impute the amount of a monthly Social Security benefit payment from the size of the offset that was taken from that payment. We then applied a modified set of rules for calculating an offset amount to the imputed benefit, changing the $750 limit to $1,072.50—the adjusted amount for the limit had it been indexed to the poverty threshold—to estimate, for 2013, whether the monthly benefit payment would have been offset had the offset limit increased at the rate of the poverty threshold.

Appendix II: GAO Contacts and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Michael Collins (Assistant Director), Michael Hartnett, Margaret Weber, Christopher Zbrozek, and Lacy Vong made key contributions to this testimony. In addition, key support was provided by Ben Bolitzer, Ying Long, John Mingus, Mimi Nguyen, Kathleen van Gelder, Walter Vance, and Craig Winslow.

This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.