How to Handle Student Loan Debt in Retirement
More senior citizens are struggling under the burden of student loan debt, leaving many wondering how it might affect their retirement.
According to The Consumer Financial Protection Bureau (CFPB), in 2015, nearly 40 percent of federal student loan borrowers age 65 and older were in default. For some, they’re paying off their own tuition bills after going back to school. For others, they’re taking on the responsibility of paying off their children or grandchildren’s student debts. Either way, the burden is growing and seniors with student loans should do what they can to protect their retirement.
The CFPB report, released in January 2017, also found that the number of older adults with student loan debt has quadrupled in the last 10 years. What’s more concerning, the amount of individual loan debt has almost doubled, putting an even tighter strain on seniors who rely on fixed incomes. Between 2005 and 2015, the number of older adults with one or more student loans increased from 700,000 to 2.8 million with the debt load increasing from $12,000 to $23,500.
The data from the CFPB shows that the striking increase likely has to do with more senior citizens paying, not for their own education but rather their kids’, grandkids’ or other relatives’ tuition and related education costs. According to the report, 75 percent of older adults (approximately 2 million) with student loans used them for their children’s or grandchildren’s education.
The CFPB found that older adults who are carrying their own student loan debt most likely chose to go back to school later in life and are paying off their own education costs. These borrowers may have taken out loans to complete a college degree program, obtain certification related to job changes, or chose to advance their existing degree to the next level, such as getting a Bachelor’s or Master’s degree in their field of study.
For older people who are already living on fixed incomes, keeping up with student loan payments can be a challenge. According to the CFPB, older adults with student loan debt in retirement are more likely to go without necessary health care, including prescription drugs. The situation becomes more severe for borrowers who are currently in default. For those borrowers, their wages and Social Security benefits could be at risk for garnishment by the federal government, putting them in an even tougher financial position.
The CFPB found that roughly 115,000 people age 50 and older are experiencing Social Security garnishments specifically due to student loan default. The government may also take money from these seniors’ tax refunds or wages in order to repay the debt. Social Security can be garnished as much as 15% of the total benefit or the amount that exceeds $750 per month, whichever is lower, according to U.S. News and World Report.
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Clearly, carrying student loan debt into your retirement years can significantly increase your risk for financial difficulty. So how do seniors with student debt protect their finances? Here are a few tips that can help:
1. If you currently have student loan debt, and you’re unsure about how to manage it or you’re worried that you won’t be able to afford the payments going into retirement, the first thing to do is to consult a professional. Working with a financial planner or adviser can help you develop a repayment strategy that works for you without putting you in a financial bind. If you’re worried that you can’t afford a financial adviser, look into your local senior resource center. Very often, they will have free or low cost financial counseling services for low- to moderate-income seniors.
2. Consider reaching out to the loan servicer to inquire about a deferment or forbearance. In some circumstances, you may be able to temporarily postpone or reduce your federal student loan payments. This can help you avoid default, but it will not eliminate your obligation completely. To receive a deferment or forbearance, you’ll need to meet certain eligibility requirements. Check out theFederal Student Aid website for details. Remember, after you apply for deferment or forbearance, you’ll need to continue making payments until your deferment or forbearance is in place.
3. See if you can opt for income-driven repayment on your federal student loans. There are three income-driven plans available: pay as you earn, income-based and income-contingent. These repayment strategies may lower your payments during periods when your income is lower. Payments are based on 10 to 20 percent of your discretionary income and are forgiven after 20 to 25 years of timely payments. Learn more and apply for income-driven repayment plans on the Federal Student Aid Website here.
4.Have multiple student loans? Consider consolidating federal loans or refinancing private loans.
5. Consider small, practical approaches to reducing spending in your household budget. This could include making an effort to reduce bills and unnecessary spending, changing your shopping habits (using more coupons, buying in bulk, shopping discount stores, etc.), and going without certain luxuries like premium cable channels, magazine subscriptions, and so on.
6. Consider tapping into your home’s equity. If you’re a homeowner and 62 or older, you may be eligible for a Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage. These mortgages allow the borrower to receive funds that are drawn from their home’s equity. Instead of the borrower making payments to the mortgage lender, the mortgage lender pays the borrower. These funds can be used for anything the homeowner wants, including paying off student loan debt. Best of all, the HECMdoes not have to be repaid until the borrower moves or passes away. At that point, the home can be sold to satisfy the HECM debt. Get more information on HECMs by browsing our Reverse Mortgage Learning Center.