Student loans are not just a problem for young people. At the end of 2020, borrowers aged 50 or older held about 22% of the nation’s $ 1.6 trillion debt burden on college students, the AARP reports.
Most of the debt of over 50 borrowers is the result of the borrower’s education. However, many people have a student loan because they took out a federal parent PLUS loan or signed a private loan for their child.
If you’re in your 50s, 60s, or older and have a student loan, retirement can feel unattainable. But there are a few ways to deal with your debt – that don’t take forever.
6 Ways To Deal With Student Loans In Retirement
To repay your student loans, you can do whatever you can to eliminate the remaining balance as much as possible. Or, you can minimize the burden on your retirement budget by keeping your payments low, even if it means you may never get rid of your debt.
Neither is the right or wrong approach. However, your options depend on the type of credit you have. Follow these tips for dealing with student loans in retirement.
1. Avoid federal student loan refinancing
When interest rates are low, it can seem tempting to refinance your student loans with a private lender. However, this is not a smart move if you have federal loans, especially if you are planning on retiring.
Your income will likely go down when you retire. When you have federal loans, you are usually entitled to income-based repayment plans, where your payments are based on your income. (More on this shortly.) In addition, federal loans offer far more relief options than private loans. For example, most federal student loans, including the Parent PLUS Loans, are covered by an administrative deferral of payments and interest until January 31, 2022 as part of the COVID-19 relief effort.
Foregoing all of this flexibility is probably not worth it, even if you can save on interest. However, if you have private student loans, refinance when you reduce your payments. You could cut your interest rate significantly if you have improved your credit score since taking out the credit.
2. Lower federal payments with earnings-related repayment
If you have federal loans that you took out for yourself, there are four different income-driven repayment plans (IDR) that you might qualify for. These plans limit your payment to a percentage of your disposable income. Your options are:
- Income-based repayment (IBR)
- Income-related repayment (ICR)
- Pay as you earn (PAYE)
- Revised payment based on earnings (REPAYE)
“The criteria for all income-oriented plans is that you participate in the plan and have to make payments for between 20 and 25 years, depending on the plan,” said Betsy Mayotte, president and founder of the Institute for Student Loan Advisors. “You don’t have to follow one another. The remaining amount, including the interest, will be awarded after 20 or 25 years. “
Instead of trying to split up on the differences, you can use the studentaid.gov loan simulator to find out which programs you qualify for and what your payment would be.
In the past, any remitted balance in the year it was forgiven was considered taxable income. But the American Rescue Plan, the stimulus bill passed in March 2021, includes a provision that makes forgiveness tax-free until December 31, 2025. Obviously, this doesn’t help someone who is just starting a 20- or 25-year repayment plan. Mayotte suggests that borrowers hope for the best as they prepare for the potential tax bill.
“You should assume that in the end there might very well be what we call the tax bomb, but there is a possibility that it won’t and Congress will extend it beyond 2025,” Mayotte said.
3. Select the income-based repayment for Parent PLUS Loans
If you have Parent PLUS loans for your child, Income Based Repayment (ICR) is the only income-based plan that you are eligible for. You need to consolidate your credit first.
Income-based plans are not as generous as the other income-based plans. Your payment is based on 20% of your disposable income. For the other income-based plans, the upper limit is 10 to 15%.
4. Pay back as much of your personal loans as possible
Unfortunately, when you have a personal student loan, your options are extremely limited. “Personal loans have very few, if any, lower payment options or relief options,” Mayotte said.
Usually the best solution is to repay the remaining balance as much as possible. Think about whether you could live on a tight budget while working an extra year or two. If you put all of your extra cash to pay off the loans, you can cut your retirement payments significantly, even if you can’t eliminate the remaining balance entirely.
If you don’t want to be faced with student loans for decades, this may also be the better approach to federal loans, even if you can get your payment down with an income-oriented plan. Keep in mind that while income-oriented plans typically lower your payments, you may end up paying more over time. This is because your payments will extend over 20 or 25 years from the standard 10-year window.
5. Check student loan forgiveness if you have a disability
If you have a disability, you could be one of the 323,000 federal borrowers receiving the automatic student loan issuance recently announced by the Department of Education. Borrowers who are found to be completely and permanently disabled by the VA or Social Security Agency will in many cases have their loans automatically waived.
But even if you don’t get forgiveness automatically, you can still qualify if you have a disability. If you are not informed of the payment of your loan, you can submit a manual application and provide a medical certificate.
6. Have a difficult conversation with your children
If you took out a Parent PLUS loan for your children, you are legally liable for that debt. But that doesn’t mean you can’t turn to them for help, especially if you’re having trouble.
“This can be a really difficult conversation, but if you can’t afford these loans even with some of the lower payment options, it may be time to have a chat with the kids you took out these loans for and them to make a contribution. ” said Mayotte.
What if you don’t pay?
You want to avoid a failure of your student loan as much as possible. Student loans are rarely deductible in bankruptcy, so it is very unlikely that your debt will go away. However, it’s important to understand what can and can’t happen if you can’t afford your payments.
The possible consequences include:
- Have your social security benefits seized. Up to 15% of your social security benefits can be seized and applied to your debt if you default on your federal loans. However, the first $ 750 per month you receive is off-limits. In addition, private lenders cannot seize your social security.
- Loss of your tax refund.
- Have your wages or your bank account seized. Whether the loans are public or private, you can be sued for unpaid student loans. If the lender gets a judgment against you, they could seize your bank account or paycheck if you are still working.
- Stock up on your credit score. Once your payment is reported late, the black mark will remain on your credit report for seven years. However, the damage will be greatest in the first two years.
However, you will not be jailed for arrears of student loan debts. Don’t believe any debt collector who threatens you with arrest. (Note: it is possible that if you are sued and summoned to court, you will be arrested if you fail to show up.)
If you cannot afford payments, it is important that you speak to your servicer as soon as possible. You often have some federal student loan options. While private lenders don’t have to make concessions, it is often worth allowing you a lower payment instead of suing you.
Retirement with student loans is feasible. However, it is important to create a plan before you retire and contact your lender immediately if you cannot afford the payment.
Robin Hartill is a certified financial planner and senior writer at The Penny Hoarder. She writes Dear Penny, a personal financial advisor. Send your tricky money questions to [email protected]