Strategies for older Americans with student debt
The following is a guest blog post written by David Rathmanner of LendEDU, a marketplace for student loans and student loan refinance.
When most people think about borrowers who are struggling with student debt, they often think of Millennials. But Millennials aren't the only ones burdened by large student loans and are having a difficult time repaying them.
In fact, older Americans have surprising amounts of student loan debt. The Consumer Financial Protection Bureau (CFPB) found that older Americans owed around $66.7 billion in student loans in 2015. The CFPB also found that there were over 867,000 student loan borrowers who were over the age of 65.
These senior borrowers are facing difficulties repaying those loans. The report estimated that 37% of older Americans with federal student loans were in default. That meant that almost 40,000 borrowers had their Social Security benefits garnished because of their unpaid loans.
You might be wondering why so many older Americans are in student debt. While some went to school later in life and are still paying off their loans, most have debt that is related to helping with their children's education. Some took on parent PLUS Loans to help their kids go to school. Others co-signed private student loans for their children and are now responsible for making the payments since their kids have defaulted on the loan.
How older Americans can repay their loans.
1. Do it before you retire.
If you have student loans, focus on getting rid of them before you retire. Once you’re on a limited income, it becomes more difficult to repay your loans since you have less money coming in. In addition, many people aged 65 or older experience unexpected health setbacks and other unforeseen expenses that could compromise their ability to repay the loans.
2. Refinance your loans.
Another reason you might want to focus on repaying your loans before you retire is to expedite your loan repayment by refinancing your debt. While you can still qualify to refinance student loans if you are retired, you are more likely to get approved and get a lower interest rate than if you were still working.
Refinancing your loans is an easy way to save money by reducing the amount you pay in interest. You might be able to qualify for a lower interest rate if you have a good credit score and a job or a guaranteed amount of retirement income coming in each month.
The lower interest rate will reduce your monthly payments, helping to repay your loans more quickly. If you choose to repay your loans more quickly, you will get out of debt faster and pay less interest overall.
3. Choose the right repayment plan.
If you have federal student loans, there are a number of repayment options you can choose from. Depending on your situation, you might want to focus on repaying your loans in a shorter period using the Standard Plan – which gives you 10 years to repay your loans.
If you are having a hard time making your payments, you might be eligible for income-based repayment plans. These plans allow you to limit your repayments to just 10%-20% of your discretionary income. If you are unable to repay your student loans after 20-25 years of making on-time payments, your remaining student loan balance will be forgiven under these plans.
Unfortunately, if you have Parent PLUS loans you are not eligible for income-based repayment, but you might be eligible for Income Contingent Repayment if you combine your Parent PLUS loans with a Federal Direct Consolidation Loan. Income Contingent Repayment would lower your payment to 20% of your discretionary income and forgive your loan after 25 years.
One thing to keep in mind before you choose a repayment plan that would spread out your repayment over a longer time period is that you end up paying more in interest over the life of your loan when you do so.
4. Set goals.
Setting goals for your debt repayment is critical because it keeps you motivated. You might decide to pay as little as $50 or $100 extra per month. While you might think this won't have a huge impact on your student loan debt, it actually makes a significant difference.
5. Use assets to repay your loans.
Another option that older Americans might have for repaying student loan debt is using other assets to repay part or all of your student debt. For example, if you sell your home to downsize, you might use some of the proceeds of the sale to repay your loans. This could make sense if you're paying a significant amount of interest on your student loans and you don't believe you'll be able to earn that percentage if you invested that money. If you are unsure if this is the right move for you, you should speak to your financial advisor.
6. You need a plan.
Whatever you decide to do to repay your student loans, it's important that you make a plan to address them. That plan might include switching to another repayment plan or refinancing your debt. Or it might involve setting goals and putting extra money towards your student debt. The more you are able to pay towards your debt’s principal each month, the faster you’ll pay it off and that will help you retire feeling more confident.
For more information about LendEDU or this topic, visit lendedu.com.