Student Loan Debt, Social Security, and Retirement

If you are currently in college or recently graduated, retirement probably feels far away. Right now, your main focus may be building a career, earning a steady income, and enjoying your lifestyle. However, if you have student loans—like millions of Americans—you should still consider how that debt could affect your future. Understanding the relationship between student loan debt and Social Security can help you make smarter financial decisions today and avoid serious problems later.

What is Social Security?

Social Security is a federal program created to provide financial support to retired and disabled workers, as well as their families.

After the Great Depression, President Franklin D. Roosevelt signed the Social Security Act (SSA) to improve economic security for Americans. Today, Social Security provides:

• Retirement benefits

• Disability income

• Survivor benefits for families

The program is funded through payroll taxes. This means a portion of every taxpayer’s paycheck goes toward Social Security.

To qualify for retirement benefits, workers generally must:

• Be at least 62 years old

• Have paid into the system for at least 10 years

While Social Security can help support you during retirement, it may not fully protect you if you still have unresolved debt.

What happens if I retire with student loan debt?

Retiring with student loan debt can significantly impact your finances.

If a federal student loan enters default, the government can take action to collect the debt—even after you retire. One of the most important things to understand about student loan debt and Social Security is that your benefits can be reduced to repay defaulted loans.

A federal student loan typically goes into default after 270 days of missed payments. Once this happens, several consequences may follow:

• Loss of eligibility for certain repayment plans

• Additional fees and penalties

• Damage to your credit score

• Wage garnishment or benefit garnishment

These penalties can make financial stability during retirement much harder to achieve.

Wage Garnishment

According to the United States Department of Labor, “Wage garnishment is a legal procedure in which a person’s earnings are required by court order to be withheld by an employer for the payment of a debt.” The government cannot take more than 15% of your Social Security payment, and you must be left with no less than $750 a month in benefits.

Areas of Consideration

Most older adults that enter retirement with student loans did not take on that debt for their own education. Parents and grandparents commonly co-sign or take out Parent PLUS loans to help pay for their child’s school. If their child fails in making on-time payments, the co-signer is in just as much trouble. According to the American Association of Retired Persons (AARP), for 1 in 4 seniors, Social Security is 90 percent of their income. If you must continue making payments in retirement, whether on your loans or those of a dependent, it could consume a lot of your income.

What to do Now

To avoid the consequences of student loan debt in retirement, make payments on time and in full. Choosing a payment plan that suits you is the first step. Income-driven repayment plans are better if federal student loans are higher than income. Revised Pay As You Earn (REPAYE) Repayment, Pay As You Earn (PAYE), and Income-Based Repayment (IBR) base payments on income and family size and are recalculated every year, adjusting to changes. 

The payments are often more affordable because they are income-based and will not exceed 10 to 15 percent of usable income, and monthly payments will be less than the standard or graduated plans. Each of these plans lasts for 20-25 years. Start saving! A 2019 AARP analysis suggested that “borrowers who wait to start saving for retirement due to their student loan debt will need to work two to seven years longer to achieve the same account balances as their peers without debt.”