Are you prepared for what happens if you stop paying your student loans? In this eye-opening interview, college finance expert Mark Kantrowitz breaks down the serious consequences of default—including wage garnishment, seized tax refunds, and how the government can take up to 15% of your Social Security benefits at any age.
Subscribe To “Broadcast Retirement Network” On YouTube For Aging, Finance, Lifestyle, Privacy, Retirement, and Wellness programming Monday through Sunday at 7:30 AM ET.
Transcript
Jeffrey Snyder, Broadcast Retirement Network
And we’re gonna welcome back to the program, Mark Kantrowitz. Mark, it’s so great to see you. Thanks for joining us this morning.
Mark Kantrowitz, College Financial Aid Expert
Thank you for having me.
Jeffrey Snyder, Broadcast Retirement Network
And last time we chatted, we talked about student loans and you were actually gonna be teaching some students at MIT. Before we get into student loan developments, how did the session go with the brilliant students at MIT?
Mark Kantrowitz, College Financial Aid Expert
Absolutely wonderful. I mean, these students are the smartest students in the world in science and mathematics. It’s part of the Research Science Institute program at MIT.
And I was very pleased with the quality of the student research, as well as the fact that we had no illnesses or injuries during the program.
Jeffrey Snyder, Broadcast Retirement Network
Well, I’m sure the parents appreciated that. And I guess it must be a hoot for you to shape eager, bright minds.
Mark Kantrowitz, College Financial Aid Expert
Yeah, and these are the students who are going to change the world. They solve unsolved math problems. They do a lot of new innovations in biotechnology and business.
And it’s amazing watching what the alumni do in the years after they leave the program.
Jeffrey Snyder, Broadcast Retirement Network
So is it like goodwill hunting? Do you remember the math? That was Harvard.
But do you remember the equation on the board? That’s what kind of triggered the whole storyline in goodwill hunting?
Mark Kantrowitz, College Financial Aid Expert
Well, I remember that it had something to do with number theory. I don’t remember the specific equation. Yeah, well, it was a great- These students are going to number theory too.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, well, kudos to you for doing that. And again, I think you show yourself to be very dynamic in terms of talking about student loans, but also helping shape the minds of the future. So Mark, the reason why I reached out is I’m very curious.
You and I had spoken, I think last month, about some of the changes that were effective July 1st, and they were substantive. And really, a lot of it had to do with restarting student loans. I’m paraphrasing here.
But my first question to you is, what happens if I don’t pay my student loan? Like I don’t even restart payments. What are some of the ramifications?
Mark Kantrowitz, College Financial Aid Expert
Well, if you don’t make payments on your student loans after 90 days delinquency, it starts getting reported on your credit history for the federal loans, 120 days for the private student loans after, well, let me restart.
Jeffrey Snyder, Broadcast Retirement Network
Sure, three, two, one. Go ahead. Okay.
Mark Kantrowitz, College Financial Aid Expert
If you don’t make payments on your student loans, they get reported to credit reporting agencies after 30 days for private student loans and after 90 days for federal student loans. If you don’t pay your private student loans for 120 days, they go into default. If you don’t pay your federal student loans for 270 days, they go into default.
And in addition to getting notices from collection agencies, the federal government has very strong powers to compel repayment. There are three main enforced collection methods. One is to garnish up to 15% of your wages.
The second is to offset your federal income tax refunds. And the third is to offset up to 15% of your social security disability and retirement benefit payments.
Jeffrey Snyder, Broadcast Retirement Network
So they really have pretty powerful reach into your current and future earnings potential Do you have, so I want to focus for a second, if I may, on social security, because what if I’m 22 years old, I just started working, this is a hypothetical, and I don’t make payments and I become, you know, I go beyond the threshold. My future social security, could they collect 15% of my future social security payments?
Mark Kantrowitz, College Financial Aid Expert
Absolutely. And if you get disabled, and it may not be just when you reach retirement age, it may be right away. And that’s the money that you need to live off of.
It’s not a very generous amount of money for your disability or retirement benefits. And it’s kind of odd, the federal government gives with one hand and then takes back with the other. And this just doesn’t seem very ethical for many people, including myself.
We wish there were another way for the government to get the student loans repaid. And the other two methods, and those are much more effective. And perhaps they should stick to just those.
Jeffrey Snyder, Broadcast Retirement Network
Well, how long is that? You know, you seem to know a lot of facts. I’m hitting with questions.
You know, we don’t pre-plan the questions, but when did this garnishment of social security begin? I mean, is it something, and I guess we’re making people aware, but are people when they sign the dotted line on those loans, are they aware? Are they made aware?
Or is it in that little tiny disclosure at the bottom that nobody reads?
Mark Kantrowitz, College Financial Aid Expert
It is in the disclosure, which you should read because it’s very important to know all the terms and conditions of your loans and as well as your rights and responsibilities. The garnishment of the offset of social security benefits started in the 1990s. There was a lawsuit to try to block it and that lawsuit failed.
And then the U.S. Department of Education started offsetting social security benefits. And the amount that was offset each year kept on increasing as more and more of ours were subjected to it.
Jeffrey Snyder, Broadcast Retirement Network
So I guess there is an opportunity to kind of right the wrong. And a U.S. Senator from Vermont has offered some legislation to try to do away with this particular provision to garnish social security. And by the way, I’m not naming him Mark, because not because I don’t like him, but because Google and YouTube don’t think that we’re doing an election ad when we do mention an office holder.
So that’s the only reason for the audience that I don’t mention the Senator’s name. But he, this Senator is trying to kind of right the wrong. In terms of the likelihood of, Senate’s out of session right now, I guess they come back after Labor Day right before the election, but is it likely that something like this could gain support?
It just seems so draconian to me, thinking about all the young people and all the older people like myself who may have loans.
Mark Kantrowitz, College Financial Aid Expert
Well, I think it potentially has bipartisan support. The administration, when they restarted repayment, they initially were going to collect from social security, but then they suspended that and they haven’t restarted that aspect of the enforced collection methods. So there might be interest on both sides of the aisle for eliminating this as an option for collecting defaulted federal student loan debt.
Jeffrey Snyder, Broadcast Retirement Network
Mark, I know you’re not an expert in retirement, but I know you save for retirement, like many people. It just seems, and we’ve had the passage of the Secure Act, Secure Act One, Secure Act Two, that did a lot of really good things. It just seems like, like you said, the one hand, the left hand or the right hand, depending on how you’re looking at me on the screen, doesn’t seem to know what the other hand is doing.
It just seems like it doesn’t align with retirement security, let alone the wage garnishment and the financial security, but the retirement security, a lot of people depend on social security, Mark.
Mark Kantrowitz, College Financial Aid Expert
The average amount of social security is roughly around $1,000. Imagine trying to live on that little money. Now, if you happen to have saved in an IRA or 401k, you may be in better shape, as well as if you have money in taxable accounts, but it’s still, it’s very difficult for our nation’s senior citizens to pay for their housing, their food, their medications, and even with Medicare, there’s still a lot of expense that they have to pay.
And so they are the group that is least capable of repaying the debt through losing 15% of their social security benefits.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I guess with the trust fund, not being in good fiscal shape, it just seems, and I understand, look, I think borrowers or creditors should be paid back. I think there’s just gotta be a better way to do that because you can’t, you’re just robbing Peter to pay Paul is the terminology I would use. Before I let you go, Mark, are there any other, there’s been a lot of talk about these accounts versus 529 plans.
These are the accounts named, I’m trying not to say the office holder’s name, named after the current sitting president that have gained a lot of popularity. Are you seeing that of interest when people consider using a 529 or these accounts or getting a federal student loan? Has it come into the equation?
Mark Kantrowitz, College Financial Aid Expert
Well, I mean, several hundred thousand people have signed up for these accounts for their children in part because there is a $1,000 birthday gift if your child was born within a few recent years, and that’s free money, and it’s hard to ignore free money. Though I and others have pointed out that this money in the account may reduce the student’s eligibility for federal student aid pretty severely because these accounts have not been exempted from being considered assets on the free application for federal student aid. So that’s something that still has to be resolved.
The U.S. Department of Education has to give guidance. There may be need for subsequent legislation to change it so that it is not considered a resource available to pay for college, that they’re not required to pay for it and if you have the money in the account for several years while you’re in college, you may be left with no money at the end of that period because as much as a fifth of the money in an asset in the child’s name reduces aid eligibility for federal purposes, 25% for about 200 private colleges, and if you take a distribution, it can reduce your aid eligibility by as much as half of that distribution. So it’s not a really good situation.
But if you’re never going to college or you’re really wealthy, then it is a nice little gift.
Jeffrey Snyder, Broadcast Retirement Network
And in terms of the 529 plan, you don’t hear that much. I mean, I hear about it because I’m kind of in tune and I read about it, but I think a lot of people don’t hear a lot about it. Is this a tool that, you know, obviously you’ve got the student loans, you have these accounts that I mentioned.
Are people taking advantage of this option as a way to pre-save for college?
Mark Kantrowitz, College Financial Aid Expert
Absolutely. There are now, I think, four or $500 million saved in 529 plans and it continues to grow every year. And when the stock market went down, the value went down temporarily, but since then it’s continued to go up and it is a tax efficient, financial aid efficient way of saving for college costs.
I mean, if you use it for qualified higher education expenses, the distributions are entirely tax-free and they have a minimal impact on eligibility for a need-based financial aid, especially if a grandparent is the one who’s the account owner. Then the qualified distributions do not affect the FAFSA and it’s not reported as an asset on the FAFSA. So if you manage it properly, it could have zero impact on aid eligibility as well as a minimal tax impact.
And it’s exempted from taxes if you do a qualified distribution. Contributions to 529 plans in two thirds of the states actually get a small tax deduction or a tax credit.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, that’s certainly positive for the taxpayer, but also for the account holder, or I should say the account holder, who’s also gonna be the taxpayer. Last question for you, Mark, and then I promise I’ll let you go. Just a question, just a general question just occurred to me.
Are we ever gonna see college tuitions go down or will they always go up? Are they gonna go up at less of a growth percentage?
Mark Kantrowitz, College Financial Aid Expert
Well, I mean, college costs on a net price have been, in certain cases, some of the public colleges have been flat. Though they, because of the high cost, high aid model, there’s pressure on them to just keep on increasing. When the main impact that we’re starting to see and we will continue to see is several colleges each year will be closing because they can’t raise the money to pay their own bills.
And these colleges tend to be small, tuition dependent, that draw their involvement from a local region as opposed to national colleges.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, that’s unfortunate. And also there are towns, entire towns that are built around these schools. If they close, it could have a really detrimental effect to those communities.
Mark Kantrowitz, College Financial Aid Expert
It’s a long-term demographic trend. The end of the baby boom echo means that there are fewer students going to college. And with fewer students, well, fewer traditional students going to college, these colleges struggle and compete with each other to enroll the new students who can pay the bills.
Now, the Ivy League colleges, MIT, Stanford, they have no problem attracting talented students, but it’s the second and third tier institutions that may have more difficulty recruiting students who are capable of paying the bills.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, very unfortunate because I think that’s a tier that we need. There are students to be served, obviously less than what we have seen in the past. Mark, we’re gonna have to leave it there.
Thank you so much for joining us. And look, we look forward to having you back on the program again very soon, sir.
Mark Kantrowitz, College Financial Aid Expert
Thank you.
