Trading Social Security Benefits for Student Loan Forgiveness? – An “E” For Effort

There’s a debt crisis in America right now, and it centers on the cost of education. Roughly 45 million people owe a total of more than $1.4 trillion in student loan debt, working out to an average of about $30,000 per borrower. Starting from such a huge hole, it’s hard for today’s millennials to chart a reasonable course forward for their finances, and the impact throughout the U.S. economy has been apparent for years.

One lawmaker is seeking to address that crisis, introducing a revolutionary new program that would allow young people to trade Social Security benefits for student loan forgiveness. Unfortunately, the program comes at a much higher cost than most of those just coming out of school will realize, potentially leading to a devastating mistake that will endanger the retirement security for tens of millions of Americans in the future.

How the Social Security-Student Loan Loan Forgiveness Program would work

Rep. Tom Garrett (R-Va.) introduced legislation in the House of Representatives in December that would provide for loan forgiveness for those who agree to delay eligibility to collect Social Security benefits. Under the bill as proposed, individuals with student loans would be able to choose to receive credits worth $550 toward debt forgiveness, allowing them to pay down their student loans on a tax-free basis.   In exchange, for each credit claimed — up to a maximum of 73 credits — an individual would have to agree to defer receiving Social Security by one month. In addition, the full retirement age under Social Security would also rise by one month per credit.

Garrett argues that giving young people a choice to use their Social Security benefits in a manner that produces tangible and immediate financial relief will put them in a better position to provide for their own financial future. At the same time, the lawmaker estimates that the resulting delay in receiving benefits could produce savings of more than $700 billion over 75 years, making a modest but substantial dent in the program’s projected shortfall between now and the end of the 21st century.

Is Social Security for loan forgiveness a fair trade?

Weighing the financial impact of the Student Security bill’s provisions requires a full understanding of how Social Security works. Proponents of the bill refer primarily to the fact that it involves delaying benefits, but it downplays the negative impact on the amount of benefits that one would collect.

Under current law, each month that you take retirement benefits before full retirement age costs you five-ninths of a percentage point in the amount you receive for the first 36 months, and then five-twelfths of a percentage point thereafter. For the millennials at whom this provision is aimed, the current retirement age of 67 means that if you claim benefits early at 62, you’ll receive only 70% of what you would have gotten if you’d waited the additional five years. Accept money to forgive your loans, and you’ll not only get fewer payments, but the payments you do get will be smaller.

To see how the program would work, take an example in which student loan borrowers agree to delay Social Security benefits for five years. They’ll get 60 credits at $550 per credit in upfront loan forgiveness, which amounts to $33,000. In exchange, they won’t be able to claim early Social Security benefits until they turn 67, and those benefits will get calculated as if their full retirement age were 72 rather than 67.

As a result, those who chose this five-year election would miss out on five years’ worth of benefits. Thereafter, the monthly checks they’d get from Social Security at 67 would be 30% lower than they’d otherwise be, and that 30% haircut would continue throughout their retired years.

It’s impossible to be sure what the value of those future benefits would be. But based on today’s dollars using today’s average benefit of $1,300, losing five years of benefits would cost young people $78,000, and subsequent reductions would cost them roughly $400 per month in additional lost Social Security for the rest of their lives. That could easily end up costing $100,000 or more — measured in today’s dollars — and that’s a huge trade-off that is so imbalanced as to look like it’s taking unfair advantage of debt-burdened young people.

Too high a price for debt relief

Student loan debt is a huge problem, and innovative solutions are important to solve it. Setting up a program that could potentially sabotage retirement prospects for today’s youth, however, isn’t the right way to structure a long-term solution. Doing so would only feed on the widespread misconception that Social Security won’t be around to give future generations anything by the time they retire.