When you scan finance headlines these days, you tend to see a lot of articles about two topics: people struggling to pay off their student loans, and people struggling to save enough for retirement. What if the two are connected?
Many seniors nearing retirement age are still paying off student loans, and as a result aren’t contributing enough to their nest egg. According to a study by the U.S. Government Accountability Office, most of those loans were taken out for children or grandchildren of the borrower.
Regardless of the reason, trying to save and pay off debt at the same time is a recipe for disaster. Here’s everything you need to know about the crisis, and what seniors can do to salvage their retirement.
Why Is This a Problem?
Seniors who still have student loans might struggle to retire on time, even if they’re feeling ready to leave the workforce. Rising healthcare costs and stagnant salaries can also create a cash-flow issue for older folks. That’s part of the reason why, according to NPR, 37% of seniors default on their student loans, compared to 17% of those 50 and younger.
Seniors have already hit their earning potential, so it’s unlikely they can find a higher-paying job to make up for any differences between how much they need to earn and how much they earn now. Physical and cognitive problems can also make it harder for them to keep a steady job, even if they do want to pay off debt.
Student loans are near impossible to discharge in bankruptcy, and it’s possible for social security benefits to be garnished to pay for student loans.
What Can Seniors Do?
Because most seniors are paying a higher interest rate on student loans, one of the best ways to pay off the balance quickly is to refinance the debt. They can do this by contacting a refinancing company which can offer rates starting at 2.79% for variable rate loans and 3.35% for fixed rate loans. Currently, the average interest rate for Parent PLUS loans is 7%, so refinancing could cut the rate in half.
Homeowners who are 62 and older can use a reverse mortgage to pay off their student loans and consolidate their debts. After paying off the existing mortgage (if there is one), the remaining proceeds can be used for anything. And since there are no required monthly payments on the reverse mortgage, the borrower can also use the money they’ll be saving each month to help pay off the student loans. Just remember the borrower is still responsible for paying property taxes, homeowners insurance, and home maintenance costs.
Seniors with retirement plans can borrow from their 401k or IRA to make payments, or withdraw the funds entirely to pay off the balance. Some prefer to borrow from a 401k instead of taking out a home equity loan because the interest they pay will go back into their retirement fund. However, they do give up any earnings they’d receive on the principal they withdraw, which could be significant. Withdrawing from retirement accounts is not recommended.
A more drastic option is refinancing the Parent PLUS loan into their child or grandchild’s name, which can be done through several refinancing companies. This transfers the debt completely into the dependent’s name. Talk to your family member if you’re having trouble making payments and want them to assume responsibility for the loan.
Everyone’s situation is different and each person may have a different option that is better for them. We recommend speaking to a financial advisor to figure out which option is best for you.
Zina Kumok is a freelance writer and owner of www.consciouscoins.com/