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Student debt pushing retirees toward poverty
Older borrowers are a small portion of the number of debtors with student loans, but debt among seniors has risen in recent decades. A study from the AARP Public Policy Institute shows that Americans over age 50, compared to any other age group, are experiencing the sharpest rates of debt increase since 1989. - photo by Roel David Smart,

Rosemary Anderson, from Watsonville, California, took out two student loans in her thirties when she earned her bachelor’s degree, and her master’s, totaling $64,000. She has worked at least one job most of her life, in addition to raising her two children.

But after health complications from lupus, and expenses from a divorce, Anderson, 57, fell behind on her payments eight years ago. With compound interest, the loans have ballooned to $126,000. With payments of $526 a month, she will be 81, she estimates, when she pays it down.

Much has been made of young people feeling the crush of student debt in a slow economy, but a new report from the Government Accountability Office says that more seniors are carrying student debt than ever before.

Federal student debt among Americans 65 and older increased sixfold since 2005, reaching $18.2 billion last year, according to the report. Anderson, who testified to the Senate Committee on Aging during a session last week to address elderly student debt, is among an estimated 2 million Americans age 60 and older who are in debt from unpaid student loans, according to data from the Federal Reserve Bank of New York.

Some have taken out student debt for others, such as children, but many are still paying down their own long-ago college classes.

“It’s astonishing that we’re still seeing people paying off these loans 40 years after they took them out,” says Robbin Itkin, a partner at Steptoe & Johnson, a national firm that specializes in bankruptcy and restructuring.

Itkin recently worked with a woman who, like Anderson, had student loans that had doubled from interest. “That’s debilitating,” said Itkin. She works with clients of all ages, but says that seniors are in a difficult situation because they are running out of time and living on a fixed income.

“The idea of America is that you go to school, you work, you save, and then you have some golden years. That’s not happening with these debt obligations.”

Garnished benefits

Student debt, often thought of as the most “responsible debt,” is also the most persistent. It isn’t forgiven in bankruptcy, except in very rare cases. So what happens if you hit retirement age and you can’t pay?

If a borrower fails to pay back federal loan debt for 425 days, the government can withhold Social Security retirement and disability payments. Last year, 155,000 Americans, including 36,000 seniors over 65, had their benefits garnished this way, according to the GOA.

Student debt can get out of control more easily than you might think, says Itkin. She often sees clients that have had a typical middle-class life, paying off a house, a car, and student loans. If you lose a job, it can be easy to fall behind, and the debt grows. The same thing can happen if you start a business that fails, she says, or have a health care crisis.

“People have paid interest over time, but they never had enough to pay it off. So it just hangs over their heads forever,” says Itkin.

There is a cap on how much the government can garnish benefit checks, but it hasn’t been adjusted for inflation for some time. As a result, the GAO reports that “the current limits may result in monthly benefits below the poverty threshold for certain defaulted borrowers.”

Not just young borrowers

The situation can be a cautionary tale for younger borrowers; student debt now stands at over $1 trillion for undergrad and graduate loans, and exceeds overall credit card debt, according to the Federal Reserve. The average student loan debt for undergrads for the class of 2014 is $33,000, up sharply from $18,600 in 2004.

Older borrowers are a small portion of the number of debtors with student loans, but debt among seniors has risen in recent decades. A study from the AARP Public Policy Institute shows that Americans over age 50, compared to any other age group, are experiencing the sharpest rates of debt increase since 1989.

“Education debt is contributing to the huge increase in overall financial debt in this country, which is likely delaying the ability of people to retire,” said Lori A. Trawinski, senior strategic policy adviser for the AARP Public Policy Institute.

A constantly multiplying debt on a fixed income makes the situation for seniors more serious, Sen. Bill Nelson, D-Florida, chairman of the Senate Special Committee on Aging, said in hearings on the issue last week.

“Those in default on their loans can see their Social Security checks garnished, leaving them with retirement income that leaves them well below the poverty line,” he said.

“Some may think of student loan debt as a young person’s problem,” he said, “but, as it turns out, that is increasingly not the case.”

Better solutions

Itkin is often struck by how often her clients who are struggling with debt, especially aging ones, also struggle with depression and physical illness, and, occasionally, suicide threats. “Debt is tremendously stressful,” she says.

A recent Gallup poll found that college grads that took on the highest amounts of student debt, $50,000 or more, were less likely than debt-free peers to rank themselves as “thriving” both financially and physically. They ranked 10 percentage points lower in “having good health” and having “enough energy.”

Massachusetts Democratic Sen. Elizabeth Warren introduced a bill in June that would let debtors who took out student loans anytime before July 2013 refinance their debt at current, lower interest rates, but it didn’t pass the Senate.

Other experts suggest debt forgiveness for the most vulnerable borrowers, those that can’t make regular payments and maintain a minimal standard of living. Itkin would like to see a solution that allows people to restructure their debt, especially if they have shown a “good faith” effort to pay them over a period of time.

“There are a few people who abuse the system, but most of these people are retirees who have worked most of their lives and had problems or fallen on hard times,” she says.