Lawsuit: Government Illegally Garnishes Disability Benefits To Repay Student Loans

Earlier this month, a Government Accountability Office report found that $171 million was garnished from older Americans’ Social Security benefits in order to repay federal student loan debts. Now, one of those borrowers is suing several government agencies accusing them of taking money from his monthly disability checks despite the fact he was eligible for a student loan discharge. 

The lawsuit, filed in September and amended last week, accuses the Department of Education, Social Security Administration, and Department of Treasury of unlawfully garnishing his Social Security disability benefits to collect on defaulted student loans despite the fact he was eligible for a full discharge of the debts.

According to the lawsuit [PDF] – which also names Dept. of Ed. John King, Treasury Secretary Jack Lew, and Social Security Administration Commissioner Carolyn Colvin – the 67-year-old man received a notice in 2013 indicating that a portion of his disability benefits would be garnished in order to pay off the student loans he obtained in the 1970s.

While the man attended college for a short time, he dropped out due to hospitalizations, and eventually defaulted on the loans. In 1973, he was diagnosed with schizophrenia and began receiving Social Security disability benefits.

Because of his diagnoses and disability, the man was eligible to have his debt wiped away under the Total and Permanent Disability discharge, which is available to borrowers with a disability that is not expected to improve.

Despite being eligible for the discharge, the lawsuit claims the man was never made aware of this option, even when he spoke with a government-hired debt collector and notified the collector that he was disabled and asked for help to avoid the offset.

“The debt collector was amply rewarded for withholding the information because it received significantly more compensation from the DOE for getting [the man]into a repayment plan than getting his loan discharged due to a disability,” the suit states.

As a result of not receiving the eligible discharge, $177 was taken out of each disability check. While the man eventually worked out a deal to pay $100 month toward the debt to avoid the larger offset, the suit claims it was still a hardship.

Eventually, the man learned that he was eligible for the TPD discharge. However, it took 11 months to prove he was eligible for the discharge, during that time the government garnished $1,300 that the plaintiff claims he “desperately needed for basic necessities.”

With the lawsuit, the man is seeking the return of funds that were garnished by the government.

The lawsuit claims that instead of focusing on getting disabled borrowers the relief they are entitled to under federal law, the Dept. of Education uses federal debt collection tools and incentive plans for hired collectors to unfairly offset SSA disability benefits.

In fact, the lawsuit accuses the Department of “providing incentives for collectors to force disabled borrowers into coercive payment plans and to withhold information about the statutory right to a disability-based discharge of student loan debt.”

For example, in 2014 a collector reportedly earned $150 for referring a borrower for a disability discharge, while they earn 16% of any money that is a borrower pays through a collection plan, according to the suit.

Because of these types of plans, the suit claims that more than 170,000 Social Security recipients, most of who are disabled and poor, have their benefits offset for student loan debts.

That figure mirrors findings of the GAO report earlier this month that revealed Social Security offsets for student loans increased from 31,000 in 2002 to 172,000 in 2015.

The Dept. of Education has taken steps this year to to make it easier for borrowers who qualify for disability discharges to receive the benefit.

In one step, the Department worked with the SSA to identify 387,000 borrowers that matched the criteria for a discharge, accounting for $7.7 billion in federal student loans.

Of those borrowers, 179,000 of those people were currently in default. The Dept. has worked to forgive about 100,000 of those consumers, removing their risk of losing federal tax refunds or having their Social Security benefits offset.

Consumer advocates praised the process, telling MarketWatch that it has potentially helped some of the people who would qualify for discharges, but it doesn’t provide notice to everyone.

“We shouldn’t involuntarily take money from people who if all the ‘i’s were dotted and ‘t’s were crossed wouldn’t owe the money,” Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, tells MarketWatch. “If we have reason to believe that you don’t owe the money we shouldn’t take your Social Security benefits or your tax refunds or whatever assets folks are using to survive.”