Theresa didn’t think she was putting her retirement in jeopardy more than 30 years ago, when she began taking out parent loans to put her three children through college. Yet now, in their 70s, she and her husband still have nearly $41,000 left to pay—one reason she plans to continue working for as long as she can.
“Life happened,” says Theresa, 76, who requested her last name be withheld because she is sharing details of her family’s financial struggles. “Things happen that you don’t expect.”
She didn’t foresee that her husband would leave a well-paying job in his 50s and never regain the salary that he left behind. Now 77, he is unable to work for health reasons, while she is a licensed clinical social worker in Illinois.
“I love what I do,’ she says, “but I’d like to think I had a choice about retirement.”
As the pandemic payment pause lifts next week, the country’s roughly 44 million federal student loan borrowers are getting ready to resume loan payments for the first time in more than three years. Some borrowers, including Theresa, never stopped making payments: her loans are commercially held and were thus ineligible for the pandemic relief program.
While student loans are commonly thought of as a younger person’s problem, one in five federal student loan borrowers, or roughly nine million Americans, is age 50 or over. That includes those who took out loans for themselves and those who borrowed to put loved ones through college. “This is not a small group,” says Doug Ornstein, senior manager of integrated solutions at TIAA Wealth Management.
Higher education costs have ballooned out of reach for many American families. To cope, it’s very easy to take out student loans, yet can be very hard to pay them back. So it’s no surprise that for many, the burden has stretched into midlife and beyond.
“The first step is acknowledging that it’s OK to be in that situation,” Ornstein says. “It can feel overwhelming, but there are steps you can take.”
Here are some tips for older borrowers.
Know What You Owe
During the payment pause, many federal borrowers kicked their student loan payments to the back of their mind. It’s time to bring them forward again. You can check what you owe at studentaid.gov.
Rodney Williams, co-founder of SoLo Funds, a community finance platform, says it will take some time for borrowers to get over the shock of repayment, but those who persist will be able to budget around their obligation. One way borrowers might cope is by taking on additional work, whether gig work like driving for a ride-hailing service or consulting projects in their usual profession.
“The most important thing is not to disengage, but to contact the loan provider to see what relief options are available,” Williams says.
Nonpayment of student loans carries serious consequences. Among them, the government can garnish a portion of your wages—and later, your Social Security check—to put toward what you owe.
“The bottom line is do whatever you can to stay in active repayment,” says Michele Shepard, senior director of college affordability at The Institute for College Access & Success.
For borrowers who have fallen into default, the government is offering a one-time, Fresh Start program to restore loans to good standing. The Education Department has also created a temporary “on-ramp” to protect borrowers from the worst consequences of late, missed, or partial payments for up to 12 months. While payments will be due and interest will accrue during this period, borrowers won’t be reported to credit bureaus, considered in default, or referred to collection agencies for late, missed, or partial payments during this time.
Despite recent efforts to improve the process, it remains very difficult to discharge student loans through bankruptcy. Federal student loans are discharged upon the borrower’s death; with private loans, terms may vary by circumstance and lender.
Research Repayment Options
In June, the U.S. Supreme Court overturned President Joe Biden’s proposal to cancel up to $20,000 in federal student loan debt for eligible borrowers. Yet more targeted options for loan forgiveness remain.
One of them is the recently revamped Public Service Loan Forgiveness program. which forgives loans after eligible borrowers have made the equivalent of 120 qualifying monthly payments under an accepted repayment plan while working full time for a qualifying government or nonprofit institution.
Older borrowers with big balances might consider switching employers to take advantage of this program, Ornstein says. Let’s say you make a low, six-figure salary in the private sector but carry a similar amount in debt. Moving to the public or nonprofit sectors would likely involve a pay cut, but the benefit of loan forgiveness could outweigh the loss in salary, especially on a big balance, Ornstein says.
The government’s newest repayment plan also involves the eventual forgiveness of unpaid balances. Called SAVE, this income-driven repayment plan lowers monthly payments for eligible borrowers and provides for loan forgiveness after 10 years on original principal balances of $12,000 or less. For bigger amounts, forgiveness will rise by one year for every additional $1,000 borrowed. For example, if your original principal balance is $14,000, you will see forgiveness after 12 years.
Parent PLUS loans are generally ineligible for SAVE. Parent PLUS borrowers who consolidate their loans into a Direct Consolidation Loan may be eligible for another income-driven repayment option, called ICR. All borrowers can check eligibility for income-driven repayment plans here.
Refinancing loans through a private lender might offer another way to lower your monthly payment. Parent PLUS loans impose higher interest rates than loans made directly to students, so they can be good candidates for refinancing.
In general, Shepard says she wouldn’t advise student borrowers to exit the federal system. The Dept. of Education offers many more protections to borrowers than private lenders, and you lose access to those when you refinance out of the federal system.
However, since Parent PLUS loans afford fewer protections than loans made directly to students, refinancing is something to consider for borrowers who plan to use their new, lower rate to pay off their balance more quickly—as long as you’re confident you won’t need to access the safety net provisions that do exist for Parent PLUS loans, Shepard says. These include the ICR income-contingent repayment plan and possible future emergency forbearance (federally held Parent PLUS loans were included in the pandemic payment pause, which also stopped interest accrual).
Don’t Raid Your Retirement
Once you hit 59 ½, the Internal Revenue Service no longer imposes an early-distribution penalty for withdrawing money from your traditional retirement accounts. It might be tempting to tap your 401(k) or individual retirement account to knock out your remaining loan balance, but this is rarely a good option, financial advisors say. Over time, the returns you’ll get in the stock market will typically exceed the interest on your student loans, so it’s good to keep that money working for you long-term. “It’s almost always better to factor your student loan payments into your retirement budget” rather than paying them off early with a 401(k) or IRA withdrawal, Ornstein says.
While student loan payments are often an impediment to retirement savings, contributing to a tax-deferred retirement account could actually help eligible borrowers lower your monthly payments. The government’s income-driven repayment plans base your monthly loan payment on a calculation involving your family size and your adjusted gross income. Tax-deferred retirement plan contributions lower your AGI, which in turn may lower your expected monthly contribution. (Income-driven payment plans are often based on the prior year’s AGI, Ornstein says, so you may have to wait a bit to reap the benefit of this strategy.)
The Secure 2.0 law will soon offer another way to grow your 401(k) balance while also paying down your debt. Starting in 2024, employers may make matching contributions to retirement plans based on an employee’s qualified student loan payments. In other words, certify that you’re paying down student loans, and if your plan offers that benefit, your employer will contribute the company match to your 401(k) based on those loan payments, rather than the amount you contribute to your retirement plan.
Shannon Poe, 53, a casino supervisor in Horn Lake, Miss., is contributing to her 401(k), but student loans have left her way behind in retirement savings. The $42,000 she took out to pursue a criminal justice degree didn’t seem like that much at the time—roughly equivalent to a year’s salary, she thought.
But the interest on her loans mounted as her pay in law enforcement remained modest. She has about $28,000 left, after paying the principal nearly several times over. While she’s hopeful she can pay that off within a couple of years, Poe is still concerned.
“I’m getting close to retirement,” she says, “and I’m terrified I’ll have this hanging over my head.”
Write to Elizabeth O’Brien at [email protected]
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