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Social Security and Student Loans – Part 2

       Last week I wrote about Social Security recipients who are delinquent on their student loans, an increasing problem as the population continues to age. For disabled and retired student loan borrowers, if they fall behind on student loan payments Social Security can garnish their checks – hold back an amount to pay down the debt. In reality, however, the amount garnished does little more than cover the fees and interest. 68% of borrowers who have Social Security reduced see none of it pay down their principal amount owed. Is there a way out?

       A borrower can apply for a financial hardship exemption or reduction. The Department of Education website does not clearly publicize this option, however there is an application form online at

       Another option for borrowers is to try to get the loan discharge because they are suffering from a total and permanent disability. A form must be completed and submitted with a document from a doctor certifying that the borrower is totally and permanently disabled. Alternatively, a Social Security Disability or Supplemental Security Income decision is sufficient but there must also be an indication that the Social Security Administration will review the disability status in the next 5 to 7 years.

       If the discharge is granted there are still reporting requirements. The borrower must notify the Dept. of Education of his/her annual income for the first 3 years. Failure to comply results in a reinstatement of the loan. A discharge of debt greater than $600 is reported to the IRS and is treated as income so that the borrower must file an income tax return.

       Loan consolidation is another possibility. A borrower can consolidate several loans into one payment with several payment plan options. One of the option provides for payments to be set at 15% of discretionary income which is calculated based on the borrower’s adjusted gross income. The loan can be discharged in 20 or 25 years.

       One final option could be bankruptcy. Although it is well known that student loans are generally not dischargeable in bankruptcy there is an undue hardship exception. If the borrower cannot maintain a minimum standard of living if forced to pay off the loans, this situation is likely to continue and the borrower has made good faith efforts to repay the loans, then a hardship exception could allow for a discharge in bankruptcy.