Would You Trade Your Social Security for Student Loan Forgiveness?

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Two of the biggest long-term financial problems facing the United States are Social Security funding and the growing level of student loan debt. One Republican congressman has introduced legislation that could help tackle both problems -- by allowing future retirees to trade some of their Social Security benefits for student loan forgiveness.

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An outside-the-box solution

It's no secret that student loan debt has become a serious problem in the United States. As of the most recent data, about 45 million Americans owe a total of $1.4 trillion in student loan debt -- this is more than all of the credit card debt, auto loan debt, and every other type of debt Americans hold besides mortgages.

Rep. Tom Garrett, a freshman Republican congressman from Virginia, has introduced new legislation known as the Student Security Act that would allow student loan borrowers to make an interesting choice. It would give borrowers the option to have some of their student loan debt forgiven in exchange for a higher Social Security full retirement age.

Rep. Garrett's plan -- the details

Rep. Garrett, who is a student loan borrower himself, is introducing a unique solution to the student debt problem that could also help fix Social Security's expected financial shortfall. https://www.congress.gov/bill/115th-congress/house-bill/1937/

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Here's how it would work. For every month a borrower agreed to raise his or her own Social Security full retirement age, they would receive $550 in student loan forgiveness. The plan would set a maximum amount of loan forgiveness of $40,150, which would result in a delay of six years and one month for the recipient's Social Security retirement age.

According to the bill's text, it would also delay the early retirement age for the recipients, which is otherwise set at age 62 as the earliest age at which you can claim a reduced benefit. For example, let's say that your full Social Security retirement age is 67 years, and you take advantage of $6,600 worth ($550 times 12 months) of student loan forgiveness under this program. Your full retirement age would now be 68 years old, and the earliest you'd be allowed to claim retirement benefits is now 63.

Would you make the trade?

This would be a completely voluntary program, so student loan debtors would need to carefully weigh the pros and cons before choosing to accept the loan forgiveness.

There would certainly be some good reasons to choose to accept loan forgiveness under this plan. For example, reducing the debt burden on younger Americans could allow them to buy homes, get married, have children, and start businesses earlier than they otherwise could. Furthermore, if these individuals are spending less of their income on debt repayment, they could have more to save in a 401(k) or IRA, making them less dependent on Social Security benefits in retirement.

However, Social Security is a guaranteed, inflation-protected stream of income available to retirees, and it's important to realize that you may not be able to work until your new, older full retirement age. If you accept the maximum amount of loan forgiveness under the plan, it translates to a full retirement age of over 73 years. Are you willing to wait that long to collect your full retirement benefit?

Just one piece of a Social Security fix

To be clear, this wouldn't fix Social Security's financial problems all by itself, although it would certainly help. The Social Security Administration estimates that the delayed benefits resulting from this plan would save Social Security roughly $700 billion over 75 years -- about 11% of the projected funding shortfall. And it's also worth mentioning that this bill is still in the relatively early stages, and several steps would need to happen before it could become law.

So, in order to truly fix Social Security, some combination of tax increases and other benefit reductions would be necessary. However, this could certainly be a step in the right direction in dealing with Social Security's funding shortfall and the ever-growing student loan debt epidemic in the United States.

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