Getting a college education is expensive for most people, and student loans are often the only solution they have. However, if you take out a substantial student loan, you will have to adhere to a repayment plan. Can a Roth IRA Be Garnished for Student Loans?
Paying down a student loan often takes between ten to thirty years. It also relies on your income driven repayment plan and the amount you borrow.
Although Roth IRA helps you financially in retirement, some student loan borrowers have lost that vital lifeline. So, if you have defaulted on your student loans, this article will let you know if student loans can garnish your Roth IRA.
Is Student Loan a Threat to Your Roth IRA?
Student loans cannot garnish your IRA unless a court order is in place. Also, the laws in your state may not protect your retirement savings if the government or a private lender wins a lawsuit against you.
If you owe money to the government, it will not wait until you are nearing retirement to collect. The government can take extreme measures if you do not make payments on the student loans. Here’s how:
- They can garnish your Social Security and Roth IRA benefits if you’re nearing retirement
- To pay off outstanding loans, the IRS can hold your federal tax refund
- The government can order your employer to withhold your wages
- Depending on your situation and loan type, they may also hold your state tax refund
Many retirees in the United States rely solely on Roth IRA and Social Security benefits for their retirement income. Over the years, the number of student loan borrowers affected by garnishment has grown.
What’s the good news, then?
There is a cap on a student loan debt that the government can garnish from your Roth IRA and Social Security.
Is There a Social Security Garnishment Limit?
The government made garnishing Social Security benefits possible, but with a cap because of the Debt Collection Improvement Act of 1996. According to the law, the government cannot take over 15% of your Social Security benefits or less than $750 in monthly benefits.
However, this cap cannot adequately protect people. The last time they changed the limit was in 1998, and since then, both the cost of living and the poverty line has risen.
Today, if you’re 65 or older, you’re considered poor if you’re making less than $1,022 a month in a one-person household. However, the government can cut your Social Security benefits to $750 a month, or $9,000 a year.
Therefore, the cuts to Social Security benefits for elderly Americans who have no other means of support to live on incomes below the poverty line.
You may not want to hear this:
Most of the money taken from Social Security payments doesn’t even go toward the loan’s principal. For example, over 70% of the $1.1 billion seized from benefits in 2016 went to pay fees and interest rather than the borrower’s actual debt.
How Many People in the United States Had Their Roth IRAs Garnished?
According to GAO, over 115,000 people aged fifty and over had their benefits garnished in 2015.
Also, between 2002 and 2015, the number of people between (49 – 65) years having the same problem rose by 408 per cent. Age 65 and older populations grew by over 530 per cent.
Also, there is the rise in wage garnishments. Data from the Education Department shows, more student loan defaulters are having their wages garnished.
Debt collectors took $2.3 billion in wage garnishments from July 2015 to September 2018, the three years covered in the study.
What Can US Citizens Do to Keep Their Roth IRA Benefits?
It is critical that borrowers with unpaid student loans understand their legal options. Senior citizens with long-term medical conditions can have their student loans forgiven completely.
Free or low-cost financial counseling can also be an option, although it depends on the situation. A financial counselor can provide you with options tailored to your needs.
What Should You Do Now That Your Student Loans Are in Default?
Don’t despair if you have fallen behind on your federal students loan repayment. Borrowers who are in default have three options available to them. The Department of Education offers:
Settlement
It helps reduce the interest and collection fees accrued over the years on your loans. Upfront payment or the ability to pay the settlement amount within 90 days is a requirement.
Consolidation
It gives you a new Direct Consolidation Loan and pays off your defaulted loans. Loan consolidation is an option if you have over one federal student loan, an FFEL Consolidation, or a Perkins Loan.
Rehabilitation
After making nine monthly student loan payments, you are eligible for a one-time program that removes you from default. The loan rehabilitation program can help you improve your credit rating by removing the default status from your credit history.
Here is how to do it:
Contacting the collection agency in charge of your loans will let you know your options. The Default Resolution Group at the Department of Education can help if you don’t know which company you’re dealing with. A loan representative will use your social security and birth date to find your loans.
Here is a point to note:
The gov’t has suspended interest rates and collections for defaulted federal student loans until September 1, 2022, due to the coronavirus epidemic.
The Bottom Line
There was $1.64 trillion in student loan debt in the United States at the start of 2021. Some of the 45 million Americans who still owe money on their student loans plan to rely on Roth IRA or Social Security in their golden years.
Protect yourself by avoiding defaulting on student loans as much as possible. The decisions you make today could have long-term consequences for your life. Bankruptcy may be an option if your financial situation is so dire that it seems like an impossibility.
No matter your background, age or financial condition, there are ways to assist you manage your student debts and climb from the shadow of debt.
