More and more frequently, American baby boomers and seniors are making payments on student loans. While in some cases, these are their own student loans from career changes or continuing education, often (and more worrisome) the debt was taken out on behalf of their children or grandchildren.
It may seem like a good idea at the time, but such borrowing can frequently endanger the delicate financial balance required for a successful retirement.
The article below from US News & World Report details the alarming statistics on seniors who are struggling with student loan debt.
More seniors are carrying student loan debt into their retirement years. The number of people age 60 and older with outstanding student loans has quadrupled over the past 10 years from 700,000 in 2005 to 2.8 million in 2015, according to a recent report from the Consumer Financial Protection Bureau. The average amount of student loan debt among older borrowers has doubled to $23,500 in 2015. Older borrowers now owe an estimated $66.7 billion for student loans.
Carrying student loan debt into your 60s or older can make it especially difficult to pay for retirement. Those who default on federal student loans might even see their tax refunds and part of their Social Security benefit withheld to repay the loan. Here’s how to deal with student loan debt as you approach retirement.
Think carefully about paying for college for a relative. While some borrowers are carrying their own or a spouse’s student debt into their retirement years, most current student loan debts among people age 60 and older were incurred paying for college for a child or grandchild (73 percent). Among the 870,000 people age 65 and older with federal student loans in 2015, 210,000 have Parent PLUS Loans, which allow parents to borrow for the undergraduate education of their children, according to the U.S. Government Accountability Office. “You should not borrow more for your children and grandchildren than your annual income. Then you should be able to pay it back in 10 years,” says Mark Kantrowitz, the publisher and vice president of strategy for Cappex.com and co-author of “Filing the FAFSA.” “If retirement is less than five years away you should borrow half as much, and if your income is less than 150 percent of the poverty line you should not borrow at all.”
You may not want to co-sign for a student loan. Private student loan lenders often require that a student apply for a loan with a co-signer who becomes responsible for the loan if the student borrower fails to pay the money back. Parents and grandparents are typically called upon to co-sign private student loans, and most co-signers on outstanding student loans are age 55 and older (57 percent). “Assume that you are going to be paying that loan back yourself in full and ask yourself if you can really afford to,” Kantrowitz says. “You want to help your children and grandchildren, but depending on the amount of debt that is going to be involved and your income, you may not be able to afford it.”
Don’t default on your payments. Borrowers are increasingly likely to default on their student loans as they age. Some 37 percent of people age 65 and older with student loans were in default in 2015, compared to 29 percent of borrowers age 50 to 64 and 17 percent of younger people with federal student loans. “You don’t want to be going into default ever on student loans,” says Earl Schultz, founder and president of Strategic Wealth Advisory in Birdsboro, Pennsylvania. “Look at every debt you have and formulate a comprehensive plan to pay it back.” If you miss a payment, aim to resume payments or renegotiate the terms of the loan as soon as you can. In some cases you can rehabilitate the loan by making on-time payments going forward.
Enroll in an income-driven repayment plan. Some types of loans are eligible for income-driven repayment plans that will reduce payments to an appropriate amount for your level of income. “It will cap your bill at a reasonable portion of your income,” says Rohit Chopra, a senior fellow at the Consumer Federation of America and former assistant director at the Consumer Financial Protection Bureau. “The remainder is forgiven after 20 years or when you pass away.” Stretching out the term of the loan might also reduce your payments but could result in more interest payments over the lifetime of the loan. You might be able to consolidate or refinance your loan and pay a lower rate going forward.
Your Social Security payments could be partially withheld. After your loan goes into default, the federal government can garnish your wages, keep your tax refund or use part of your Social Security benefit to pay down the loan. Some 40,000 people had their Social Security payments partially withheld to repay federal student loans in 2015, up from 8,700 in 2005, according to the CFPB report. As much as 15 percent of Social Security payments can be withheld to repay student loan debt, but Social Security monthly checks cannot be reduced to below $750 per month, an amount that is not adjusted for inflation each year. “If they do default on the federal loans, it will take a couple of years before they reach the garnishment of Social Security benefits,” Kantrowitz says. “Contact the Department of Education and appeal for an alternative repayment plan. If you can make the case that you can’t afford your existing repayment plan, the Department of Education does have the authority to create an alternative repayment plan and let you repay over that.”
Watch out for aggressive debt collectors. The CFPB says people age 62 and older have submitted approximately 1,100 student loan complaints and 500 debt collection complaints related to student loans. Retirees told the CFPB that service providers make it difficult to enroll in income-driven repayment plans or misallocate payments to other loans with the same service provider. Some seniors report receiving multiple harassing calls from debt collectors that sometimes include offensive language. “If your servicer is giving you the cold shoulder, file a complaint with the Consumer Financial Protection Bureau so you can get the right answer,” Chopra says. “Don’t feel rushed by your student loan servicer. It is their job to give you all of the information you need to make the right choice.”