Facing student loan debt and retirement
- If a loan goes into default, wages and Social Security benefits can be garnished.
- Income-driven repayment programs can lower monthly payments on some loans.
- Tapping home equity or freeing up cash by reducing expenses are other options.
Twenty-somethings are the poster children for student loan debt, but it's actually their grandparents who have the most cause for concern. Since 2005, debt levels have more than tripled among those ages 50 to 59 and more than quintupled for borrowers ages 60 and up. Currently, the average student loan balance for borrowers ages 50 to 59 is $23,183. Those ages 60 to 69 are only doing slightly better, with average loan balances of $19,225. According to the Federal Reserve Bank of New York, nearly 17 percent of outstanding student loan debt is held by borrowers age 50 or older.
Average student loan debt balance
Source: Federal Reserve Bank of New York.
Student loans are challenging for new college grads, but for borrowers who are ready to retire, they can be a serious financial detriment. Here's what you need to know about tackling federal student loan debt before retirement.
It's not like other debt
One reason student loans are so threatening: They're hard to shed. Once a federal student loan has gone into default, the federal government can withhold your tax refund, garnish wages, take a portion of your Social Security benefits and ask for the entire unpaid balance of your loan with interest immediately.
Data from the Treasury Department show that the number of retirees who had their Social Security benefits reduced because of delinquent student loans has shot up from six cases in 2000 to 122,056 in 2012. Recipients of Social Security retirement and disability benefits are sent notices and given numerous opportunities to work out a repayment plan or dispute the debt before their checks are reduced.
Social Security checks garnished for student loan debt
Source: U.S. Treasury Department.
Debts such as credit card charges and medical bills can oftentimes be discharged in bankruptcy, but neither federal nor private student loans can be discharged unless the borrower dies, is permanently disabled or can prove that the loan will prevent him or her from maintaining a minimal standard of living, reports the Department of Education.
One way to reduce payments on federal student loans is to enroll in the government's income-based repayment plan, says Rick Darvis, a CPA and college planning specialist with the National Institute of Certified College Planners, which is headquartered in Plentywood, Mont.
Some payment plan options
The income-based repayment program allows borrowers to cap their monthly loan payments at 15 percent of "discretionary income," which is defined as anything more than 150 percent of the current poverty line. For 2013, that means any income more than $16,755 for a single person with no dependents. After 25 years of consecutive payments, the government will forgive any remaining debt, though borrowers will pay taxes on the amount forgiven. The new Pay As You Earn plan, which went into effect Dec. 21, 2012, will reduce payments to 10 percent of discretionary income and grant forgiveness after 20 years of consecutive payments, but it only applies to borrowers who took out a new loan on or after October 2007 and received a loan disbursement on or after October 2011.
Income-driven repayment programs can lower monthly payments and keep loans from going into default, but "those aren't available for a parent's debt," says Darvis. Private loans and loans a borrower took out on behalf of a child or grandchild aren't eligible.
If an income-based repayment plan isn't available, think about loan consolidation or graduated repayment plans, both of which can lower payments by stretching them out over a longer period of time, says Kevin Walker, co-founder and CEO of SimpleTuition.com, a student loan comparison site based in Boston.
"It costs you more over the long run because you're paying interest for longer, but you might get yourself a lower monthly payment to alleviate some of the budgetary pressure on a month-to-month basis," he says.
Older borrowers often have an advantage, because they may have access to resources that aren't available to fresh college grads. Borrowers who own homes may be able to combine their student loans with their mortgage, says Paul Lupo, owner and president of Lupo & Associates, a tax and college planning firm in Shelton, Conn.
"You might pay a little more in interest; however, you'll probably lower your monthly payment, which might not be a bad situation to do," he says.
Home equity lines of credit and life insurance loans can potentially pay off a student loan at a lower interest rate and provide a few tax benefits, but borrowers should be aware that there aren't as many repayment options.
"If you borrow from your home equity to pay for college, the bank isn't going to say, 'Well, we'll defer that,'" says Darvis. "You don't have as much flexibility in paying it back."
Instead of borrowing from one pot to pay another, Darvis recommends freeing up cash in the budget by cutting back on expenses and raising deductibles on such things as health and auto insurance.
Perhaps the most important step older borrowers can take is talking about their financial situation with their children at the point when they're being asked to co-sign a loan. The federal government does not allow parents to transfer Direct Plus loan debt back to the student, but some private loans come with the ability to release a co-signer if the student can demonstrate he or she can consistently make monthly payments. These releases typically require that the student make anywhere from 12 to 36 consecutive on-time payments and may also require a credit check.
The easiest way to sidestep long-lasting debt is for families to set expectations on how much debt the family can take on, who's responsible and what happens if someone can't pay, says Lupo.
"I think the conversation should start before they're walking into college," he adds.