Editorial Policy

The retiree’s guide to student loan debt

Dawn Papandrea

March 10, 2015

It might sound odd, but a small yet growing number of retirees who are learning to live on a fixed income or the assets they accumulated in their working years are also toiling with education-related loans.

A Government Accountability Office study found that the amount of student loan debt carried by Americans aged 65 to 74 has increased more than five times since 2005, topping $18.2 billion in liability. And, the older Boomers get, the more likely they are to default on these loans, with 54 percent of those 75 and older going into default.

How did this happen?

It's unlikely these loans were from the retirees' own undergraduate education 40 years ago, says Mark Kantrowitz, senior VP and publisher of Edvisors.com and a student loan expert. “Debt was much less prevalent then. More likely, it's someone who went back to school later in life either to finish a bachelor's or for a more advanced degree,” he explains. The other possibility is that the debt wasn't for their education at all, but for their children or grandchildren. The Parent PLUS loan program or being a co-signer of a loan for children leaves older people on the hook if the primary borrower defaults.

Your Social Security check could be impacted

People who default on student loans sometimes ignore it and assume it has gone away if a lender hasn't been aggressive about tracking the borrower down. But there is no such thing as loan forgiveness because of age, says Kantrowitz. “Once people retire and file for Social Security, it usually catches up with them.” The federal loan program knows the Social Security number of the person who has the debt, and they can skim off the top of Social Security payments until the student loans are repaid. This garnishment program, referred to as “offsetting,” began in 2002, and has been ramping up ever since, says Kantrowitz. In fact, during the period between 2002 and 2013, the number of Americans whose Social Security benefits were offset rose approximately 500 percent.

To avoid losing a percentage of what can be the only source of income in retirement years (the U.S. Department of Education can offset up to 15 percent of Social Security disability and retirement benefits) there are some options available.

In the preretirement years

Whether you have student loan debt or other obligations, you should take a hard look at your current lifestyle and consider downsizing so you can free up some funds that can go toward debt repayment, says Marilyn Timbers, retirement coach and financial adviser for Voya Financial. “Downsizing may be as simple as creating a strict budget or cooking all your meals rather than dining out and skipping a few vacations. Or, it could be more drastic and entail downsizing,” she says.

With 43 percent of retirees carrying a mortgage in retirement, according to Voya research, it may make sense to downsize your home in advance if you can. “Moving to a more modest home earlier can free up resources that will let you deal with debt,” says Timbers.

Another extreme measure to consider is putting off your retirement if you're able-bodied enough to continue working. Pushing back the date even a year or two can make a big difference, says Timbers. “Not only can you use that extra time to chip away at debt, but your Social Security benefits will increase the longer you delay claiming them, until age 70,” she explains.

You could also look into restructuring all of your debt. “Using a home equity loan to pay off the student loans can get you out of default so you won't have lenders offsetting your Social Security benefit payments,” says Kantrowitz. The idea here is if you can qualify for a lower interest rate through either a cash-out refinance program or a home equity loan, it will reduce the amount of interest that is accruing on your balances owed.

Lastly, ask your children for help, especially if the loan that has you in trouble is one you borrowed to help pay for their education, says Kantrowitz.

What you shouldn't do? Dip into your retirement savings, says Timbers. “Regardless of debt, you will need money to live on during retirement and will likely be grateful that your 401(k), IRA or any other retirement vehicle is solid a few years from now,” she says. Plus, if you're not yet over age 59½, you will have to pay a penalty for using those funds.

When you're in retirement

First, know that Social Security offsetting doesn't mean you'll lose your entire check to federal education loan repayment. Your monthly benefit won't drop lower than $750, according to the Social Security Administration. That being said, if you have sufficient money to pay off the debt and still maintain a suitable standard of living, it's probably better to do so since the interest rate on debt is likely to exceed the interest rate on your savings, says Kantrowitz.

On the other hand, if you don't have the money for payoff, your goal should be to reduce the monthly payments as much as possible. Switching to an income-based repayment plan will probably result in a lower monthly payment than administrative wage garnishment, says Kantrowitz.

If you've defaulted on your loans, you can rehabilitate the debt and remove the default in one of two ways:

  1. Make nine out of 10 consecutive full monthly on-time payments through an agreement with the holder of the loan.
  2. Consolidate the loans into the federal Direct Loan program, and agree to pay using an income-based repayment plan.

Note, however, loan rehabilitation is a one-shot deal, so if you've tried it before, you won't be eligible to go through the process again, says Kantrowitz. However, because a default is a black mark on your credit report, if you can work on getting that resolved through rehabilitation, your overall credit standing will eventually improve.

If you're looking ahead toward retirement and still dealing with student loans, keep this one takeaway in mind: “The reality is that debt persists,” says Kantrowitz. And when it resurfaces in retirement, it puts a burden on you at a time when your resources are more diminished. In short, the earlier you can tackle your lingering student loans, the better off you'll be.