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Pay Student Loans or Lose Social Security Pay
By Martin E. Segal, Miami Herald
March 6, 2006
Q: I recently applied for early social security benefits at age 62. During my meeting with a government representative, I was told that I had $20,000 of unpaid student loans outstanding from many years ago when I attended college and because of a new court ruling, that amount would be deducted from my benefits. To tell the truth, I did receive the loans but had forgotten about them after so many years, and the government never contacted me demanding collection. Can the government legally charge me now? It seems unfair, especially if due to financial problems I can't afford to repay the loans now and need my benefits to live on.
-- ``Troubled Retiree''
in West Palm Beach
A: Unfortunately for you, the U.S. Supreme Court unanimously decided in December 2005 that the government can seize Social Security benefits to pay off old student loans, in Lockhart v. U.S. (546 U.S.(04-881) 2005). The plaintiff in that case was a 67-year old retiree unemployed since 1981 and disabled after double heart bypass surgery and related health problems. He lived solely on his $874 monthly benefits. He had incurred $80,000 of student loans to attend various colleges back in the 1980s. When notified his benefits would be cut by 15 percent to repay his loans, he acted as his own attorney and filed an injunction action in federal court to block the Social Security offsets. The trial judge dismissed his case and that ruling was affirmed in Lockhart's appeal to the 9th Circuit court. He succeeded in getting the U.S. Supreme Court to hear the case, but it unanimously affirmed the prior ruling.
Lower courts had been divided for years on this issue due to conflicting federal laws.
The Debt Collection Act of 1982 imposed a 10-year time limit for collecting amounts due the government, and Lockhart argued that his benefits couldn't be reduced because they were more than 10 years old. But the Higher Education Technical Amendments of 1991 eliminated time limitations to collect certain loans and, as the Supreme Court pointed out in its decision, The Debt Collection Improvement Act of 1996 specifically stated that ''all payments due an individual under the Social Security Act shall be subject to offset under this section.'' (This offset allows government garnishment of up to 15 percent of most Social Security benefits to repay defaulted student loans.)
The practical impact of the new case is far-reaching. For years the U.S. government has been criticized for not developing an effective plan to recover unpaid student loans, thus costing taxpayers huge amounts of money. According to the Bush administration, the current amount of outstanding student loans exceeds $33 billion, of which $7.4 billion is delinquent and $5.7 billion is over 10 years old.
Supporters of Lockhart say it creates a long-needed collection procedure for unpaid student loans.
Critics of the decision suggest the government's failure to collect these debts within 10 years should result in cancellation, because to do otherwise effectively repeals part of the Social Security law to the detriment of financially vulnerable recipients.
WHAT ARE MY FEDERAL STUDENT AID OPTIONS?
Q: I'm a recently graduated college business major who, proud to say, made it through without needing loans thanks primarily to some savings and working while enrolled. But now I've decided to get an MBA degree, and I'll need financial assistance. What's the current situation?
--``Aid Seeker''
in South Florida
A: There are so many different loan programs for all student levels that a complete explanation is beyond this column. There are federal loans and grants, state and college operated programs, and additional educational funding available through private lenders, professional organizations, local businesses, civic groups and private foundations. The best information website we found is located at
www.studentaid.ed.gov.
The first step for any type of loan is filling out the Free Application for Federal Student Aid available online with forms and work sheets at
www.fafsa.ed.gov.
It opens the door for possible financial assistance.
The Department of Education started accepting applications for the 2005-06 academic year on Jan. 1, 2005, and the deadline for filing is June 30, 2006.
You're late in this process but may still be able to get current assistance, depending on availability of funds. If not, you can apply for 2006-07 up to its July 2, 2007, deadline. Many nonfederal programs have annual funding limits and disburse on a first-to-apply priority basis. Many private universities have earlier filing deadlines.
The FAFSA application process is time-consuming and requires numerous supporting documents that include:
• Most recent W-2 employment income forms
• Documentation of other sources of income including social security or veteran's benefits
• Statements showing current assets and liabilities
• Records related to family finances
• Up to six schools to which the applicant intends to apply.
You probably could also have qualified for assistance with your undergraduate tuition, even if you thought you were financially ineligible. This is the case for many potential loan recipients who often fail to apply. A 2005 study by the American Council on Education found that even though there are hundreds of thousands of dollars available annually, more than one-half of all undergraduates failed to even file an application. The Council also estimated that 850,000 of those students were probably eligible for federal grants that have no repayment obligation. Here is a summary of six of the main federal student aid programs:
• Pell Grant -- No repayment obligation, only for undergrads with no prior degree, financial need must be proved, provides up to $4,050 per year.
• Supplemental Educational Opportunity Grant (SEOG) -- For full-time undergrads pursuing first bachelor's degrees, exceptional financial need required, priority given to Pell Grant recipients, pays up to $4,000 per year but may have funding limitations.
• Perkins Loan -- The school is the lender using federal funds, for undergrads and grads, full-time students only, financial need must be proved, fixed 5 percent interest rate, pays up to $4,000 annually to undergrads with $20,000 cap, pays up to $6,000 annually to grads with $40,000 cap that includes any undergrad loans, up to 10 years repayment time, no loan fees, interest subsidized by federal government while enrolled and through nine-month grace period after leaving school. Loan forgiveness in whole or part for careers in education, law enforcement and the military.
• Stafford Loan -- For undergrads and grads, full-time and part-time students, variable annual interest rate capped at 8.25 percent (currently 4.7 percent but rises to 6.8 percent on July 1, 2006), repayment time up to 10 years.
Subsidized loans: Need-based with interest subsidy while enrolled, repayment starts six months after graduation or dropping below one-half enrolled credits, annual limits are $5,500 for undergrads and $8,500 for grads.
Unsubsidized loans: Interest accrues from beginning of the loan, annual loan limits for undergrads is $10,500 and $18,500 for graduate students, may also require up to 4 percent lender origination fee, repayment may be to private lenders in Family Education Program or to federal government in Direct Loan Program, debt cap for undergrads is $46,000 with maximum one-half subsidized, debt cap for grads is $138,500 with maximum $65,500 subsidized.
• Supplemental Loan to Students (SLS) -- After an approved Stafford loan, additional annual funding available up to $5,000 undergrad and $10,000 grad.
• PLUS Loan -- For parents of dependent undergrads enrolled on a full or part-time one-half basis, applicant passes credit-worthiness test, variable annual interest rate is capped at 9 percent (currently 6.1 percent but rises to 8.5 percent on July 1, 2006), repayment begins within 60 days after loan is disbursed, up to 4 percent lender origination fee.
The Deficit Reduction bill passed by Congress in December modified some aspects of federal student loan programs, and the Bush administration has announced its intention to try to eliminate the Perkins loan program. Student loan applicants who file starting in 2006 should be sure to note the current changes.
Ask Doctor Law appears in every other edition of Business Monday. Send your questions to
askdoctorlaw@MiamiHeraldcom. Martin E. Segal, a licensed attorney, lectures in business law at the University of Miami. Visit him at
www.dr-law.com.
Disclaimer: This column is not intended to be a solicitation of legal business or the furnishing of self-help legal advice. Laws vary from state to state. Readers are strongly urged to consult independent and qualified legal professionals before making any business decisions. The views expressed are those of the writer and not of The Miami Herald.
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