Heading Into Retirement With Student Loans

According to the Consumer Financial Protection Bureau (CPFB), the number of student loan borrowers 60 and older rose at least 20% nationwide between 2012 and 2017. In more than 75% of states, outstanding student loan debt increased by 50% or more. Why this happens, the potential negative consequences and how to lessen the impact are all questions well worth addressing.

Most seniors with student loan debt do not take out loans for themselves. The CFPB report found that 73% of older student loan borrowers said they took out or co-signed loans for a child or grandchild. Only 27% reported taking out loans for themselves or for a spouse.

People don’t often realize that co-signing a loan makes you a co-borrower and therefore responsible for repayment when the person you co-signed for fails to pay. Additionally, it’s often difficult to put pressure on that family member, especially when they say they don’t have the resources to pay back the loan. For those who take out loans for themselves or a spouse, the expected new job may never come, or illness may prevent paying off the loan in a timely manner.

Most student loan debt cannot be erased by bankruptcy. This puts seniors at greater financial risk leading to a variety of potential negative consequences.

Forced to Work Longer – Seniors with student loan debt are often forced to work longer before retiring or work part time in retirement to meet expenses.

Lost Retirement Savings – Based on results of a joint report by the Association of Young Americans (AYA) and AARP, 31% of baby boomers (Americans 54 to 72 years old) reported that student loan debt forced them to stop saving for retirement or tap into existing retirement savings to pay down student loan debt.

Delayed Health Care – About 9% of seniors in the AYA/AARP study said student loan debt prevented them from obtaining the health care they needed. Baby boomers with student loan debt had overall household debt that averaged 48% versus 15% for those with no student loan debt.

Credit Issues – With average student loan debt of more than $40,000, according to Credit Sesame, many seniors can’t obtain new loans to make needed home repairs, buy a new car or deal with other major expenses. The AYA/AARP study found that 32% of seniors said lingering student loan debt prevented or delayed the purchase of a new home.

Inability to Help Family – More than 1 in 4 boomers said student loan debt prevented them from helping a family member in need even though, in many cases, the debt itself rose from helping a child or grandchild further their education.

Garnishment of Social Security Benefits – The American Seniors Association (ASA) notes that when retirees are not able to pay back their federal student loans on time, lenders may garnish a portion of their Social Security benefits or offset part of their tax refund.

Defaulting on Student Loan Debt – The ultimate negative consequence for many older Americans with student loan debt happens when they default on those loans. By 2015 according to the CFPB, 37% of borrowers 65 and over had defaulted compared with 29% of those 50 to 64 and just 17% of those 49 and under.

There are steps you can take to avoid problems with student debt as well as ways to handle that debt once it's part of your financial picture.

Talk It Over - Before you co-sign, have a conversation with your co-borrower and ask questions about the amount of the loan, how (and when) they expect to be able to pay it back and whether there are scholarships or less expensive (but suitable) options available. Don’t be afraid to say no if the answers don’t make sense.

Prepare for Problems – Once you’ve decided to co-sign, make sure you can handle repayment of the loan in the event your co-borrower can’t (or won’t). If other family members have indicated they will help, make sure you get that in writing.

Understand Your Rights and Obligations – Stay on top of payments once they begin including making sure your co-borrower is current. If you are repaying the loan, make sure your loan servicer provides all details including balance due, monthly payment, interest rate and payoff date. File a complaint with the CFPB if you are not getting the information you need or are receiving harassing calls or letters. Some lenders, such as Sallie Mae, will provide a “co-signer release” after a certain number of on-time loan payments have been made, however a 2015 study by the CFPB found that only about 10% of co-signer release applications were approved.

Know Your Repayment Options – They include deferment or forbearance that lets you stop making payments for a set time period if, for example, you have trouble putting food on the table or paying other bills. Consolidation of multiple student loans may result in a smaller payment. Other options include income-based repayment (IBR), income-contingent repayment (ICR), pay as you earn (PAYE) and revised pay as you earn (REPAYE), some of which forgive any existing balance after 20 years or when you pass away. In general, Federal student loans have more repayment options than private loans. Learn more about your options here.

Understand Social Security Rules – While up to 15% of your Social Security payments can be withheld to repay student loan debt, your monthly check cannot be reduced below $750. Once you default it takes about two years for garnishment to begin giving you time to contact the loan servicer or department of education to try to arrange an alternate repayment plan. If you are receiving Social Security disability benefits you may be eligible for a disability discharge in which your loan is totally forgiven.

Before you co-sign for a student loan, make sure you understand your obligations and the potential costs to you if your co-borrower fails to pay back the loan as promised. If your find yourself with more student loan debt than you feel you can handle, there are options that will allow you to repay that debt in a way that doesn’t hurt you financially and, in some cases, can result in the debt being forgiven.