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Could Student Loan Debt Reduce My Social Security Payments?

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Do you think American’s have more outstanding credit card debt or student loan debt? If you said student loan debt you would be correct! In fact, as of April 2014, American’s had $1.12 Trillion in student loan debt compared to $854 billion in credit card debt. That’s 31% more student loan debt than credit card debt!

It is also important to know however that not all debt is created equal. One important difference between credit card debt and student loan debt is that credit card debt is extinguished in bankruptcy but student loan debt is not. Student loan debt doesn’t die until you do!

So what does any of this have to do with social security benefits? Well, as it turns out, if you have delinquent Federal student loan debt, your social security benefits can be reduced until that student loan debt is paid off.

And it is not limited to delinquent student loan debt. There are over 30 Federal programs, in addition to the Federal student loan program, that participate in this Federal debt recapture program of delinquent Federal debt whereby social security benefit payments are reduced until the debt is paid off. Examples of other Federal programs include home loan’s owed to the Veteran’s Administration (VA) and food stamp overpayments owed to the Food and Nutrition Service etc.

Social Security participates in a program called Benefit Payment Offset or BPO.  The Debt Collection Improvement Act of 1996 (DCIA) authorized BPO. DCIA requires Federal-disbursing agencies to offset Federal payments to collect delinquent “non-tax” debts owed to the Federal government. Therefore, delinquent Federal debts, excluding taxes owed to the IRS, are handled by BPO. The collection of delinquent taxes is handled separately by the IRS.

BPO applies when someone who is receiving Social Security benefits owes money to another federal agency.  The amount owed to the other federal agency is transmitted to Social Security and it is then withheld from the Social Security beneficiary’s benefits.  The transfer of funds due is handled by BFS, which is part of the Department of Treasury.  They send three letters to the debtor – one 60 days in advance, one 30 days in advance and one when the recovery begins.

BFS determines the offset amount. It is the least of:

a.  the amount of the debt; or
b. an amount equal to 15% of the monthly benefit payment (MBP); or
c. the amount by which the Monthly Benefit Payment exceeds $750.

By law, BPO will not reduce benefit payments below $750 per month. Therefore, social security beneficiaries who have been identified by the BPO process as delinquent debtors will still receive a minimum $750/month.

If more than one debt is owed to a Federal agency or agencies, the policy is to collect the oldest debt first. Once the oldest debt is paid off collection will proceed with the next oldest debt and so on until all outstanding Federal debts are collected.

As the Federal government continues to struggle with managing the growing costs of their numerous entitlement programs there is a growing focus to recoup outstanding delinquent debts wherever they may be in the system. With the advent of technology and a focus on debt collection the social security system is just one more mechanism to recoup these debts.

One important way to ensure you receive all the social security benefits that you are entitled to is to ensure you pay off all outstanding Federal debt prior to filing for you social security benefits. For most Americans, the ability to pay for expenses in retirement is challenging enough. The last thing you need is to have your social security benefits reduced due to delinquent Federal debt.

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