Nov. 3, 2023
This blog is the final piece in a series focused on older Americans with student debt. The first post finds that many older borrowers are repaying debt from their own education. The second post uses survey data to explore the demographics and financial well-being of seniors repaying their college loans. And the third post tells the stories of some of these borrowers.
Former college students report taking out loans to invest in their future financial security. This investment in higher education often pays off, leading to good jobs and higher earnings, and many are able to repay their student debt. But a subset of borrowers do not see their hoped-for financial return and struggle to afford their loan payments year after year. Eventually, they age into one of the fastest growing subsets of student loan borrowers—adults approaching retirement age.
Borrowers who still carry debt from their own education well into their senior years often attended low-value programs that did not provide enough support to help them reach graduation. Even when they did graduate, their credentials did not lead to the higher wages they had hoped for and expected. As they made their way into student loan repayment, they were met with a complex system in which the benefits available to low-resource borrowers were inadequately explained and hard to access.
It is no wonder that, after being poorly served in higher education and afterwards, many of these older Americans ended up defaulting on their loans. In 2015, 39 percent of borrowers over 65 still repaying their own student loans were in default (compared to 17 percent of borrowers under 50). By then, many had spent years dealing with unaffordable bills, ruined credit, garnished wages, and disappointed career dreams. They ended up with lower wealth and savings rates than their peers who never even attended college.
This is not how an investment in college is supposed to work. College should be an engine of economic mobility, and borrowing to access higher education should not lead to a lifetime of debt. But for this group of seniors—disproportionately women and people of color—the engine sputtered. To ensure fewer borrowers join the ranks of these older Americans with student debt, Congress and the Department of Education should work toward seven common-sense reforms. These reforms are based on three guiding principles: any debt borrowers take out should fuel their success, the default system should be restorative rather than punitive, and long-struggling borrowers should receive targeted forgiveness.
Ensure Borrowers Only Take Out Debt That Fuels Their Success
1. Protect Students From a Low-Value Education
When colleges serve their students well, graduates earn more and have an easier time repaying student loans. But the borrowers who still owe on their student debt into their 60s and beyond were often poorly served by their colleges. These borrowers are four times more likely to have attended a low-value, for-profit college than other similarly aged college attendees. They also are more likely than other borrowers to have not completed their degree, often a sign of receiving too little support while in school.
The Department of Education recently finalized regulations that will require short-term programs and programs run by for-profit colleges to meet basic quality standards in order to disburse federal financial aid, along with additional rules that will provide increased consumer protections. Going forward, these regulations will protect many students from accruing the type of unaffordable debt that often leads to default. Congress must support the Department of Education’s efforts to implement these critical protections, including by providing the Department with adequate financial resources. Congress should also consider other measures to increase the returns students receive from postsecondary education, ranging from helping students navigate the cost of college to providing support for students’ basic needs.
2. Screen Struggling Borrowers for Loan Discharges
Current law allows for student loan forgiveness when eligible borrowers have made a certain number of qualifying payments under specific programs, like income-driven repayment plans and Public Service Loan Forgiveness (PSLF). The law also permits loan discharges under circumstances that make repayment unaffordable or unfair, such as when borrowers become permanently disabled, attend a school that subsequently closes, or enroll in a school that engages in misconduct, including misleading marketing or aggressive recruiting.
While these programs have traditionally been underused, the Department has recently made progress in automating and improving the application and discharge processes, contributing to $127 billion worth of forgiveness for 3.6 million borrowers. As part of an ongoing rulemaking process, the Department is also seeking to discharge loans—without borrowers needing to take action—for those who are eligible for forgiveness through repayment plans and existing programs but have not applied or enrolled.
Despite this progress, some borrowers eligible for discharge programs still need to take steps to receive relief. As a result, many eligible for forgiveness end up defaulting on their loans because they do not know about the programs and are not screened for them. New America met several older borrowers who had been struggling to repay their loans for over a decade, facing ruined credit and garnished wages, even though they were likely eligible for a student loan discharge the entire time. The Department of Education should continue to automate discharge processes wherever possible, including through its regulatory authority and data matches with other government entities. The Department must also implement a process to screen struggling borrowers for eligibility for forgiveness—as well as signs of having suffered from fraud—before they experience any of the consequences that come with defaulting on student loans.
Make Default Less Punitive and Easier to Exit
3. Make Sure Borrowers in Default Do Not Pay More Than They Would in Repayment
In 2015, almost 40 percent of older Americans with their own student loans were in default, and others likely cycled through default at some point in their repayment journeys. When borrowers are in default, their credit score falls and the government can garnish their wages, withhold tax refunds and federal benefits like Social Security, and charge high collection fees. In fact, the law allows the government to collect much more from borrowers in default than those borrowers would pay if their loans were current. Older borrowers in default told us, and survey data confirms, that these garnishments and offsets are a hardship that deprives them of the resources they need to get back on their feet and support their families.
The Department of Education and Congress can both play a role in limiting the amount that can be collected from borrowers—from any source—to the amount the borrower would owe if they were current on their loans and enrolled in an affordable income-driven repayment plan. These repayment plans, which cap payments at a certain percentage of income, ensure borrowers are not forced into poverty or material hardship to repay their student loans. The Department has already committed to taking steps toward implementing such protections in default.
4. Stop the Garnishment of Social Security Benefits, Especially for the Lowest-Income Borrowers
Older borrowers in default need relief from the unsparing garnishment of Social Security payments. Currently, when the government garnishes Social Security checks, it can leave seniors with as little as $750 per month, an amount below the federal poverty guidelines and not indexed to inflation. Out of the roughly 173,000 defaulted borrowers who had their Social Security benefits seized in 2015, about 70 percent were left with benefits below the federal poverty guideline. Congress must act to protect more Social Security dollars from garnishments and more seniors from poverty.
5. Create a New Pathway Out of Default
The many seniors in default spend years trapped in that status, losing out on tax refunds, earned wages, a better credit score, and a chance to access forgiveness through programs like PSLF. They get trapped in default because the pathways back into repayment are complex, confusing, and can usually be used only once. As a result, some older borrowers who had defaulted previously have no affordable ways to return to repayment.
Congress should allow borrowers to exit default through simple pathways that can be used multiple times. These options for exiting default could include enrolling in an income-driven repayment plan or, for those already in such a plan when they default, paying some or all of their past-due balances (as opposed to their entire outstanding balances). This would ensure that those with low incomes have consistent, affordable options for leaving default. The law change should also eliminate collection fees and ensure that defaults are wiped from a borrower’s credit history once their loans leave default, regardless of the method a borrower used to bring their loans current. (The Department has already worked to streamline the return to repayment for some low-income borrowers who provide income information when they enter default.)
Provide Targeted Forgiveness
6. Credit Time in Default Towards Forgiveness
Borrowers are eligible for loan forgiveness in an income-driven repayment plan after a certain number—typically 20 to 25 years’ worth—of qualifying payments. Many borrowers that work in public service are eligible for forgiveness after 10 years through PSLF. However, over the last two decades, some borrowers’ have spent months in statuses, like forbearance and default, that did not count towards forgiveness in these plans. Borrowers may have ended up in these statuses because they did not know about affordable income-driven repayment plans and received improper or incomplete advice about how to manage their loans. Even borrowers who should have been eligible for the forgiveness encountered processing delays and poor record keeping.
To fix these problems, the Biden Administration announced a one-time income-driven repayment count adjustment. This initiative is crediting time spent in typically ineligible statutes, including forbearance, towards income-driven repayment forgiveness and PSLF. As a result of this adjustment, among other efforts, the number of borrowers who have received forgiveness through an income-driven repayment plan jumped from less than 200 in 2021 to 855,000 today.
Unfortunately, this initiative does not credit time in default towards forgiveness, which means that many of the most vulnerable seniors—even those who have been repaying for over two decades—have yet to receive relief. Many older borrowers defaulted as a direct result of the same problems that prompted the adjustment in the first place: they could not afford their payments and were guided towards forbearance instead of long-term relief. Many ended up defaulting when they exhausted their forbearance eligibility.
As part of its current rulemaking process on debt relief, the Department proposed a one-time cancellation of debt older than 25 years, regardless of time spent in default. This provision is critical and will provide relief to many older borrowers who have not yet received income-driven repayment or other forgiveness. However, a group of vulnerable seniors—those who borrowed fewer than 25 years ago—would still not receive credit towards forgiveness for time spent in default. To serve this group, the Department should shorten the retroactive forgiveness period, as described below, and count past periods spent in default toward forgiveness.
7. Cancel Debt for Borrowers Who Have Been in Repayment and Default for Years
Even if many of the reforms listed above were enacted, some older borrowers who have suffered from the legacy of low-value schools, confusing communication, and a punishing default system would still owe their long-standing debts. These borrowers deserve a clean slate.
To provide this new start, the Department should go beyond a 25-year period when providing one-time retroactive forgiveness. The Department should consider aligning the number of years required for this one-time forgiveness with the years required for forgiveness in the new SAVE repayment plan (a policy that will disproportionately help borrowers who have spent time in default). The SAVE plan, which became available in summer 2023, allows earlier discharges for those with low original balances or with only undergraduate debt. Going forward, the Department should adopt a policy of cancelling debt after borrowers have been in repayment for a certain number of years (which could be related to the income-driven repayment plan forgiveness schedule).
In addition to forgiving the debts of borrowers that have been in repayment for long periods of time, the Department should also consider age when making cancellation determinations. Recent analysis from New America found that older borrowers still repaying on their own student loans tend to have low incomes and little wealth (for instance, 61 percent do not have 3 months’ worth of emergency savings), leaving little for the government to collect. Indeed, in 2016, the Government Accountability Office found that three quarters of the collections from Social Security offsets go to collection fees and interest rather than paying down the principal. Collecting on borrowers nearing retirement who have been unable to pay down their balances for years provides little financial benefit to the government, but enacts a large human toll.
The Department should, as part of a hardship provision or elsewhere in its new rules, create shorter repayment periods for older borrowers—such as those who are 65 and older or over retirement age—especially if they have paid a certain percent of their original balances or have received public benefits. Such financially prudent forgivenesses would give borrowers a late-life respite from a decades-long financial and emotional burden.
New America would like to thank the RRF Foundation for Aging for its support of this work.