5 Tips for Managing Student Loans During Retirement

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The following is presented for informational purposes only.

Student loan debt continues to grasp at millions of borrowers’ purse strings far into their later years. Many parents take out loans to help pay for a child’s education, even if they’re still paying off their own student loans. And many adults take out student loans to return to school and finish a degree or get a new degree while pursuing a career change.

According to a Consumer Financial Protection Bureau report from 2017, the 60-plus age group is the fastest growing group of student loan borrowers. However, whether you’re planning for retirement or already collecting Social Security, the student loans don’t simply go away. Here are five major points to keep in mind if you’re repaying student loans and heading into retirement.

1. Default can have major consequences

If you’re having trouble making your loan payments, you’ll want to be aware of when your student loans could go into default. For federal student loans, this occurs if you don’t make your payments for 270 days (about nine monthly payments). There isn’t a uniform timeline for private student loans, and they can go into default sooner.

This is important because once your loans are in default, you’ll immediately owe the entire balance and won’t be on your repayment plan anymore. You may be charged additional fees and have to deal with other consequences, such as the debt collector getting a judgment against you and taking money directly from your paycheck or Social Security benefits. The IRS could also apply your tax refund to your student loan payments instead of sending you the money.

You may be able to rehabilitate loans and get back on a payment plan. But it’s best to avoid default altogether, and there could be affordable ways to do this.

2. Look into income-driven repayment plans

One option to avoid defaulting on federal student loans is to switch to an income-driven repayment (IDR) plan. There are four plans to choose from and your eligibility and the best option may depend on the type of federal loans you have and your financial situation. For example, if you took out a parent PLUS loan to help pay for a child’s education, you’ll need to consolidate the loan before enrolling in an IDR plan.

The IDR plans can lower your monthly payments to 10 to 20 percent of your discretionary income, which depends on your annual income and the federal poverty line in your area. In some cases, your monthly payment could go all the way down to $0, which will still be considered an on-time payment. As a result, the monthly payments can continue to build your positive credit history and won’t lead to default.

Each year, you’ll have to recertify your income, which you can do online. As long as you stay on the plan, and depending on the plan you choose, the remainder of your loan balance will be forgiven after 20 to 25 years.

3. Remember that forgiveness can lead to a large tax bill

Unfortunately, student loan debt that’s forgiven after staying on an IDR plan will be considered taxable income for the year. If you’re already having trouble affording your monthly payments, the tax bill can be a shock. Especially if your loan balance has grown because your low monthly payments didn’t cover the accruing interest.

There are different options for dealing with an unaffordable tax bill, including a payment plan — although that might put you back at square zero. In some cases, you may be able to settle the tax debt for less than the full amount, which could be some seniors’ best option.

4. Consider bankruptcy a viable option

Special rules apply to federal and private student loans that can make it especially hard to have the debt discharged in bankruptcy. However, it’s not impossible.

Especially if you’re already in retirement and living on a fixed income, or if you have a medical condition that prevents you from working, you may have a case. Your case could be even stronger with private student loans because they aren’t eligible for the federal repayment plans that can significantly lower your monthly payments.

While declaring bankruptcy isn’t ideal, it could discharge much of your debt while allowing you to stay in your primary residence, keep your vehicle, and hold on to everyday necessities. It could also put an end to Social Security garnishments, which could increase your monthly income and lead to a more pleasant retirement.

5. You won’t pass on the debt

Older borrowers may worry about passing on their student loan debt to a spouse or children when they die. Fortunately, this isn’t always the case.

Federal student loans will be discharged if the borrower dies and a proof of death gets submitted to the loan servicer. This means the estate won’t have to pay off the remaining balance — it’s simply forgiven. Even if the borrower had a parent PLUS loan for someone else, the debt is still discharged. However, the discharged debt could lead to a tax bill that the estate has to settle before paying heirs and other beneficiaries.

Private student loans might not offer a death discharge (it depends on the lender), which means your estate may be responsible for the remaining private student loan debt. The repayment responsibility could also pass on to a cosigner, if you had one, or to your spouse if you took out the student loan after you got married and you live in a community property state.

Get personalized advice

Whether you’re struggling to afford your student loan payments or doing okay but want to know your options, you can schedule an appointment call with one of Money Management International’s trained and certified counselors to receive personalized guidance.

Tagged in Retirement

Louis DeNicola is a personal finance writer with a passion for sharing advice on credit and how to save money. In addition to being a contributing writer at MMI, you can find his work on Credit Karma, MSN Money, Cheapism, Business Insider, and Daily Finance.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
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