Can He Keep the Man From Taking His Money?

March 29, 2024 6:13 PM

You are not my financial advisor: I’m not knowledgable about these issues, but my nephew has a chance to provide for his future—and he’s even less knowledgable than I am—but outstanding student loans could be a problem. More below the fold.

My nephew is about to inherit something in the neighborhood of 100K. Assume that this is after taxes. He would like to put it away and ensure for his retirement—he’s 41 and works for the city, which will give him a decent pension—but he has a large student loan debt which he has not paid on in at least 15 years. He is bound and determined to never pay this debt, and I don’t blame him, but YMMV. (Note: With all due respect, please refrain from opining about the relative morality of paying/not paying—thanks!)

He wants to know several things: A—the best way to invest this so that he has a nest egg upon retirement, B—how likely is it that the government would want to grab this money, and if so C—what’s the best way to prevent this from happening?

posted by ivanthenotsoterrible to Work & Money (15 answers total)

B—how likely is it that the government would want to grab this money, and if so C—what’s the best way to prevent this from happening?

There's no reason in your question to suspect that "the government" would "want" to "grab" the money. You said it's an inheritance. Inheritances are not grabbed unless there's something shady about the estate or unless your nephew is already in some sort of trouble. Do you believe the lender has been watching your nephew all these years? Ask the executor of the estate for a first-level answer. Or is it somehow not an interitance?

More to the point ... get a fee-only financial planner for the investment question, and an accountant for the "grab" question. Show them all the facts and get expert opinions (in your state).
posted by JimN2TAW at 6:47 PM on March 29

For that amount of money, I think a simple, safe, low cost, set it and forget plan would be to invest in something like the Vanguard Target Retirement Funds. It provides a balance of risk and return that is prudent and reasonable and automatically adjusts as the retirement date gets closer.
posted by metahawk at 7:23 PM on March 29

This is not a moral or judgy answer, just practical, but the best way to ensure his future finances is to pay the debt off. It's not going to magically go away.
posted by so fucking future at 7:36 PM on March 29

The following is a result of my google search:

https://www.tateesq.com/learn/can-inheritance-garnished-student-loans
"Can inheritance be garnished for student loans?
Ordinarily, an inheritance can’t be garnished for federal student loans or private student loans. But if you stop making payments and your loans default, a student loan lawsuit could be filed against you. If that happens and the court enters judgment against you, then any funds in your bank account — including your inheritance — could be levied or taken to repay the debt.
Thankfully, there are options to prevent that from happening. For instance, you can:
enroll in an income-driven repayment plan (federal student loans)
request a forbearance or deferment
​apply for loan consolidation
refinance with a private lender
negotiate a settlement
file student loan bankruptcy"
posted by SageTrail at 7:48 PM on March 29

I assume from your mention of “the government” that these are US federal student loans. (If not, it might be useful to know his jurisdiction and who the lender is, whether government or private business.)

If so, there are various options to have federal students loans forgiven. As a local government employee he should look into Public Service Loan Forgiveness. If his loans are in default, see also Fresh Start. Depending on his income, the SAVE plan may also be relevant.

This will require him to enter into a payment plan, but it will prevent the debt from growing, and eventually it will make the debt go away repaying the full amount. Getting out of debt is the only real way to protect his financial future.
posted by mbrubeck at 7:53 PM on March 29

it will make the debt go away repaying the full amount

I accidentally deleted part of this sentence when editing my comment. I meant to say “will make the debt go away without him repaying the full amount.”
posted by mbrubeck at 8:32 PM on March 29

Your nephew should probably talk to an attorney about this.

My understanding of US student loans is that you can't make them go away by ignoring them. There are some programs that allow them to be forgiven, but if your nephew wants to just ignore, he will continue to be at risk. Whoever holds the loans could come after him.

One possible way to protect the inheritance would be to place it in a trust that is structured to protect the money, and only make specified payments to your nephew. This might be possible. Again, you would need to talk to an attorney who specializes in trusts to see if this could be arranged, and it would be possible to use such a trust to protect the money from student loan repayment demands.
posted by Winnie the Proust at 8:49 PM on March 29

If these are Direct federal loans, the government needn’t even get a court judgment; wage garnishment can be done administratively. They can intercept tax returns and, notably for your nephew, they can, and will, garnish Social Security payments (partially). With a judgment they can levy on bank accounts, too. IRAs are not shielded, though 401ks might be.

In short, if it’s a Direct loan and the feds decide to pursue your nephew, they can get the money. Not sure what his exact situation is that they’re not already pursuing him. In terms of his retirement, better to not have his benefits garnished!

If it was a FFEL loan (initially through a bank) then most of the above applies but the creditor has to get a judgment, can’t touch SS benefits, and can’t intercept tax returns (usually). I’m summarizing a bit because I’m traveling but in short: hard to shield these assets if they’re pursued.
posted by praemunire at 9:33 PM on March 29

I know he doesn't wish to pay the loan back, but he should seriously consider enrolling in the Fresh Start program (which goes away after September), and doing catch up payments under an income-driven plan and PSLF. It would take a chunk out of that inheritance, but it would make it a non-issue going forward.
posted by DebetEsse at 1:55 AM on March 30

You haven't really given us a lot to go on, so you may be getting either terrible or wonderful advice above, depending on the specifics.

Just for example, if nephew is on an income-contingent repayment plan of some kind, and has a fairly low income (due to working for a city) and say a family of any size at all he could very well have no payments or have them in forbearance or whatever and they will be discharged either after 20/25 years OR through the public service loan forgiveness program (city employment again). So maybe nephew has this all in hand.

However, if not then literally RIGHT NOW is the time to address that and fix it. Because the opportunities to repair these things and get on a really advantageous program is open NOW but only for a short time longer. So he needs to get on this now (if he's not already). Don't waste time.

Just for example I signed up for an income contingent repayment program about 2 yrs ago and never had to make a payment on it. They sent me a notice that the debt was discharged and "here is a refund on your last payment". (I had paid literally 20 years plus one month and under this plan - in which I had not previously been enrolled - the debt was discharged after 20 years. I was only kicking myself because I could have been enrolled in income-contingent repayment for all that 20 years and my payments would like have been between $0 and $100/month for most of that time. One thing the Biden admin is doing is letting people switch plans - generally getting on the one they should have been on in the first place - and starting getting the benefits now. However, the deadlines to do that are either fast approaching or in some cases, already past. So do move fast on this.)

My suggestion would be to get the exact details of both the student loan situation and the inheritance and post to both r/pslf and r/studentloans. There are some really sharp people there who understand the system in detail and will be able to suggest what to do exactly.

Again, don't waste time. Deadlines are looming.

Regarding how the inheritance may affect student loan payments, the short answer is that as a rule, under income-driven repayment plans, they do not. Read all the details here - and that site, studentloansherpa.com is a pretty good resource in general.

Another, perhaps even better, resource is TISLA - their founder Betsy Mayotte is a frequent contributor to r/studentloans and has saved the bacon of many student loan holders.
posted by flug at 2:33 AM on March 30

I feel like we're missing part of the detail here - is there a reason your nephew is "bound and determined not to pay" this loan? I'm not asking from a moral standpoint, mind you, but an info one - I mean, hell, if it was a debt to someone shady, maybe there's been some kind of legal ruling over the past 15 years which has already waived this and he could look into that.
posted by EmpressCallipygos at 4:17 AM on March 30

“an income-contingent repayment plan of some kind”

I didn’t get into this because of OP’s requested constraints on answers, but if OP does try to sell nephew on this, it’s income-driven not income-contingent as the general term. Being pedantic only because ICR is a very old and not very beneficial program and if you’re googling or talking to a dim witted servicer rep safer to use the right terminology.
posted by praemunire at 10:40 AM on March 30

I was a public employee with student loans when I inherited around 40k. I was paying the loans on an income-based program. I discovered that putting money into retirement accounts reduced the amount I had to pay to student loans. I used the inheritance by putting it into a regular IRA for the max allowable amount for several years. My students loans eventually got canceled for public service.
My solution may not work for your nephew but might be worth checking out.

I hate the whole system with a passion!
posted by mareli at 6:14 AM on March 31

To EmpressCallipygos: he's just fucking stubborn. I think once he's considered all this and had a moment to think about it, he'll see that he can't just blow it off forever. To say "fuck them, I'm NEVER going to pay it and they can suck my balls" (a more or less verbatim quote) is not out of character. He's not totally unreasonable, though, and after reading the responses (and pressure from his uncle!) I think he might have second thoughts.

I also want to thank everyone for their responses. I have two other nephews that are in the same boat and are also reading this thread.
posted by ivanthenotsoterrible at 1:47 PM on March 31

If he really has been just completely blowing them off, then right now might well be his best chance ever to get things on the right track.

All payments were automatically put on hold during the pandemic, yet every month still counted as though you were making a full monthly payment, for purposes of programs like PSLF.

Student loan payments haven't even really resumed yet, due to complications of getting the whole system going again without a bunch of screwups.

Point is . . . if he just slides in to his loan processing company, gets things all switched to a much better plan, gets sign up to the PSLF program (public service loan forgiveness) and then starts making the new, much lower payments here in a couple of months when all that resumes - well, if he manages all that he is likely to get credit for paying his monthly payments between March 2020 and now, and also all those years credit towards PSLF loan forgiveness.

You only need 10 years of payments for PSLF forgiveness, and there are four of those years right there - if he plays is cards right and gets a bit lucky.

You can sell it to him as a way to say FU to the man, but 100% legally - and without extreme danger to his credit score, and all the other bad things (wage garnishment etc) that can happen if you don't pay the student loans.
posted by flug at 8:07 PM on April 4