It’s hard not to feel that there’s something wrong when the government takes $50 each month from a 72-year-old retiree’s Social Security check to help pay off a student loan she took out 40 years ago. Yet, that’s what I thought as I watched a recent congressional hearing about the student loan problems facing many elderly Americans.
That hearing on “Indebted for Life: Older Americans and Student Loan Debt” addressed the financial woes of people like 72-year-old Florida resident, Janet Lee Dupree, who borrowed $3,000 from the federal government in the early 1970s to pay for her college education, but because she didn’t make her interest payments when they came due, now has a $15,000 debt that she’ll never be able to repay. But, she can’t just ignore it because federal law allows the government to garnish part of her Social Security check as partial payment of her student loan. Sen. Bill Nelson (D-Fla.) recounted her story to the Senate’s Special Committee on Aging that he chairs.
After hearing her tale, it became clear that the real problem isn’t so much that the government is garnishing benefits, but that so many people make bad financial decisions that they find themselves in these onerous positions.
Too many Americans are functionally “financially illiterate.” And, despite the importance of finance in everyone’s lives, the problem is getting worse over time, especially for women.
In a hearing devoted to analyzing the student loan debt burden of older Americans, the Senate committee learned from the Government Accountability Office that households headed by people age 65 and older were carrying about $18.2 billion of federal student debt in 2013, according to data from the Department of Education.That’s a nearly six-fold increase since 2005.
There are a surprisingly large and growing number of retirees like Janet Dupree — some 36,000, in fact —who have defaulted on their student loans and, as a consequence, have part of their Social Security benefits taken away, according to the GAO. That’s up from about 6,000 individuals who had their benefits offset in 2002, which was the first full year that Treasury began taking away Social Security benefits to offset federal student loan debt.
These offsets aren’t trivial. The Treasury Department collected an average of around $130 each month from these retirees in 2013.
Although benefits can’t fall below a $750 floor, that amount isn’t indexed for inflation and it’s now well below the poverty line. Had the floor been indexed for inflation, more than 60 percent of borrowers over age 64 wouldn’t be having their Social Security benefits reduced. Sen. Susan Collins (R-Maine) plans to introduce legislation that will index the floor for inflation.
Moreover, these loans aren’t for their children’s or their grandchildren’s education. More than 80 percent of the outstanding loans are for the retirees own education (the data don’t indicate whether the debt is for loans taken out relatively recently or when the debtor was a young, college student).
How is it that so many elderly people have such large student loan debt?
One reason is because people, in general, don’t have a good grasp of their finances. Survey after survey shows that Americans are financially illiterate.
A recent survey, for example, asked a basic question about interest compounding — If you put $100 in a savings account that earns 2 percent interest a year, would you have more than $100 after five years, less than $100, or exactly $100? — and two others on inflation, and risk. Only one in three Americans could answer all three questions correctly.
This is a big problem because people who don’t know how to do the interest calculation are much less likely to plan for their retirement or to accumulate wealth.
The financial literacy problem is especially acute for women. Only 22 percent of women got all three questions correct.
Along with the gender gap in pay, there’s a gender gap in financial literacy.
That’s what George Washington University business school professor Annamaria Lusardi and her co-author Professor Olivia S. Mitchell from the Wharton School at the University of Pennsylvania found when they surveyed levels of financial literacy.
Whether it’s a fairly simple question about the impact of compound interest or how inflation affects the rate of return on an investment, or a slightly more complicated one about the riskiness of an investment portfolio, women aren’t as financially knowledgeable as men.
“We find a gender deficit in financial literacy when we survey Americans of all ages,” Lusardi told me in her office, tucked away inside George Washington University’s Global Financial Literacy Excellence Center. Lusardi is known for her devotion to improving financial literacy and is the academic director of GWU’s literacy center.
Lusardi has some thoughts about why women have a relatively low financial knowledge.
“Women are less exposed to financial matters than men are,” she told me. “People acquire financial knowledge from those around them, and many women just don’t have that opportunity to learn from their peers. They often leave the financial decisions to their husbands, or learn about finances only when they need to know them, such as when they are widowed or nearing retirement.”
Women also have a confidence gap when it comes to financial literacy.
“As soon as a question becomes technical, women become more likely to say ‘I don’t know.'”
Lusardi finds this situation worrisome.
“Women are taking care of others and they’re living longer than ever before, so we should care about their financial acumen,” she lamented. “Poverty after retirement is concentrated in one group — women.”
So, what needs to be done to avoid the problems that women like Janet Dupree face?
“We need to use language that speaks to women, to use examples that, say refer to how to double the ingredients in a recipe rather than relying so often on sports analogies. And we need to start early.”
“Financial education is like health,” she explained. “If we wait to treat a person until they’re sick, it’s often too late, and it’s often much more costly.”
The same thing is true of financial education.
“We can’t wait until someone is 60 or 70 years old to teach them how to manage their finances,” Lusardi stressed.
What can be done about student debt?
“Look, ignorance isn’t bliss,” Lusardi said. “Figuring out how much money is prudent to borrow isn’t rocket science.”
“Why aren’t students asking questions about whether they’ll be able to pay back their debt at the time that they’re taking out their loans? Why don’t they realize that when they borrow money, they’ll eventually have to pay it back?”
Those are good questions. And, until we find solutions to them, we’ll continue to hear stories, like those of Janet Lee Dupree, who at a time when she should be enjoying a financially-secure retirement, is still burdened by a debt she took out 40 years ago.