Another Economic Canary Died… Anyone Noticing?


By David Donhoff

Another economic canary died… anyone noticing?
I am…

It’s no secret that falling behind on student loan payments can squash a borrower’s hopes of building savings, buying a home or even finding work. Now, thousands of retirees are learning that defaulting on student-debt can threaten something that used to be untouchable: their Social Security benefits.

The government’s withholding power also extends to Social Security disability benefits. Tammy Brown of Redding, Calif. says that the government has been taking $179 out of her Social Security disability check each month for the past five years. Brown, 52, became disabled in 1986 after being involved in a car accident. Unable to work, she fell behind on her student loan payments. She says the Social Security check is now too small to cover her food and medical bills, so she quit taking prescription pain pills. “It’s kind of hard to live on this amount of money,” she says.

From a Previous Publication:

Posted by VINNYNY.
As a mortgage banker after graduation, I had dozens of clients who did not qualify for mortgages because they had defaulted on student loans. The absolute worst offenders weredoctors and lawyers. In fact, I stopped taking applications from doctors because virtually all had bad education debts.”

Dave’s Comments;
Of course, the mature and responsible thing for everyone to do is to repay one’s debts, preferably on time and in full. Then again, sometimes “life happens” and adjustments have to be made… sometimes in the timing (and even the certainty of timing,) and sometimes ultimately in partial or complete default… sometimes leading to derogatory credit or bankruptcy. The most critical thing every person must do is manage their economics to remain self-sufficient and survive.

Its easily arguable in favor of the government (as lender) garnishing wages (social security) as the income payor… but there is a more critical point here.

When a person takes out a credit card loan, both the lender and borrower understand that the loan is unsecured, and that any delay or default is at the lender’s risks… and the loans are subsequently priced in rates & fee for those risks, plus the lenders cautiously measure how much credit they offer.

When a person takes out a real estate mortgage, both the lender and the borrower understand that the outstanding balance is collateralized by the value of the real estate itself… and in some instances *ONLY* the value of the real estate can be used to offset any delay or default costs to the lender (so if the value ends up less than the outstanding loan balance, in some cases that unsecured balance is again at the lender’s full risk.) This reduction of risks is priced into the rates & fees & terms as well. MORE IMPORTANTLY, this allows a smart and responsible borrower to SEGREGATE RISKS… like a large ship tanker with compartmentalization so that the ship can take a direct torpedo hit, and still proceed without sinking.

MANY federal student loan borrowers were probably unaware that although their student loans were unsecured, the lender (the government) still reserved garnishment rights against their future social security income and disability benefits. Being unaware is no excuse, and earns no sympathy…

However social security benefits are commonly expected to be “last resort safety net” benefits, not any kind of luxury lifestyle supplementation therefore easily tapped for repayment of student loans. There is something that seems viscerally sinister in the idea of a lender squeezing out repayments from someone’s ‘last resort’ sustenance income source.

ULTIMATE MORAL OF THE STORY: Risk Compartmentalization!
Better to never put yourself in the position of relying on *anything* from government benefits… but if you are given no choice (such as a career in a position where paying into the social security system is mandatory,) then be fully aware that the government can determine in the future, for whatever reason convenient at the time, that you owe them money. In this particular story case, the “balance owed” is obvious and “bright line” in student loans… but I think its safe to realize that politicians can be ruthless when the system is financially starving, and every asset they have access to is vulnerable, in order of their ease of access.

The most obviously and immediately vulnerable are accumulated payout benefits, as described above. The close second most vulnerable are the so-called “qualified plans” (401k/403b/TSP plans, IRAs, ROTHs, etc.)

Everything has its own measures of risks… and a previously under-recognized risk is now making itself known; Government economic desperation strong enough to break the sanctity of last-resort social safety nets.

Build your safety nets beyond the risks of liens & garnishments, whenever possible.