Here's a New Reason to Worry About Student Debt

By Maurie Backman Markets Fool.com

Americans certainly aren't strangers to student debt. The average Class of 2016 graduate came away $37,172 in the hole, up 6% from the previous year, and across all age groups, Americans owe close to $1.3 trillion in total outstanding loans. But it's not just 20- and 30-somethings who continue to walk around saddled with student debt. According to a new report from the Government Accountability Office, the number of people 60 and over with student debt jumped from 700,000 back in 2005 to 2.8 million in 2015.

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Not only do more older Americans continue to carry debt, but they owe more money than they did a decade prior. Among borrowers 60 and over, the average amount of student debt almost doubled from $12,100 back in 2005 to $23,500 in 2015. All in all, Americans 60 and older owe an estimated $66.7 billion in outstanding student loan debt, and while many seniors struggle to consistently make those payments, those who don't manage to keep up could face an unexpected penalty: reduced Social Security benefits.

Image source: Getty Images.

The consequences of unpaid student loans

Student loans are among the toughest type of debt to shake. Unlike other forms of debt, student loans can't typically be discharged in bankruptcy. But failing to make student loan payments won't just damage your credit; it could also impact your Social Security benefits.

In 2015, an estimated 173,000 Americans had their benefits reduced as a result of having defaulted on their student loans. Back in 2002, only 36,000 Americans were similarly penalized. In fact, over the past decade, a good 67,000 seniors have had their Social Security payments garnished to the point where they've ended up well below the poverty line.

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Part of the problem stems from the fact that the threshold for Social Security garnishments, which was set in 1998, has not since been adjusted for inflation. Given that Social Security serves as the sole source of income for roughly 25% of seniors 65 and older, having benefits garnished is a dangerous repercussion to face. Raising that threshold could prevent countless seniors from meeting a similar fate going forward, but without Congress stepping in, that's not likely to happen.

To add a bit of insult to injury, garnishing Social Security payments has proven to be rather ineffective in collecting outstanding student debt. Over 33% of older Americans were found to remain in default on their student loans even after two years of reduced benefits. But until another solution is found, seniors who can't pay their student debt will continue to face the very frightening prospect of garnishment.

Borrow smartly and pay on time

While older borrowers have fewer options for changing their circumstances, younger borrowers would be wise to learn from their senior counterparts. First, the obvious: The less money you borrow to finance an education, the easier it'll be to keep up with student loan payments over time. For some students, this might mean deferring enrollment for a year or two in order to work, save, and pay some of those tuition expenses up front rather than borrow the bulk. For others, it might mean opting for in-state public or community college rather than springing for private institutions.

For the 2016-2017 school year, tuition alone at a private college cost $33,480. Tuition for public in-state college, meanwhile, was just $9,650 on average -- still a lot of money, but far less than what the typical private school charged. Choosing a public college over a private one could effectively shave over $95,000 off the cost of an education, and that doesn't even take room and board into account.

Finally, aim to limit your borrowing to federal loans only. Private lenders are notorious for imposing high interest rates, and they offer little flexibility with regard to repayment. Federal loans, on the other hand, come with fixed, pre-established rates, and if you encounter a financial hardship, you can often qualify for some sort of forbearance or deferment.

No matter what borrowing strategy you implement, the key is to be aware of the repercussions of long-term student debt. Those who fail to pay off their loans earlier in life risk running into financial trouble at a time when they're already vulnerable. So if you're thinking of taking on a mountain debt to finance your education, let this be a warning: Those payments might follow you all the way into retirement, and once that happens, you'll be compromising your financial security in more ways than one.

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