Most of us would not expect individuals entering their retirement years to still be encumbered with student loan debt.
Yet, in fact, consumers age 60 and older make up the fastest-growing segment of the student loan market. In 2005, about 700,000 individuals age 60 and older had outstanding student loan debt. In 2015, that number had grown to 2.8 million.
In about 73% of cases, older borrowers are paying off student loans for their children or grandchildren. Only 27% are paying off their own or their spouses' loans. Therefore, in this article, we will focus on older borrowers who owe debt on loans for their children or grandchildren.
Student loan debt can pose a heavy financial burden for retired borrowers. While older borrowers typically owe less money than younger borrowers (an average of $23,000 versus $37,000), their ability to pay off the debt is less certain. Older student loan borrowers also have higher default rates. Borrowers under age 50 have default rates of 17%; 29% for those ages 50 to 64; and 37% for those age 65 and older.
Older borrowers who default on federal student loans are also subject to such consequences as wage garnishment, having their income tax refund withheld to pay the debt, and having their Social Security income being offset (reduced) by a monthly amount of up to 15% to repay the debt.
However, there are steps older borrowers can take if they are struggling to pay off student loans. The options depend on whether the borrower took out a government loan called a Parent PLUS loan, or co-signed on a private loan for a child or grandchild.
Options for borrowers with Parent PLUS loans
Borrowers having difficulty repaying these loans can consider the following options, regardless of whether the debt is current or delinquent:
- See if the debt can be discharged. Discharge may be possible if the borrower is totally and permanently disabled, is unable to hold a full-time job, is receiving Social Security Disability Income (SSDI), or is certified by the U.S. Department of Veterans Affairs as disabled.
- Determine whether the debt can be canceled. Cancellation may be an option if a student attended certain for-profit schools that closed while or shortly after they were in attendance.
- Take advantage of any available deferment or forbearance options, either of which can be used to temporarily postpone making payments during, for example, periods of economic hardship, reduced income, or illness. (However, interest does continue to accrue during these periods.)
- Apply for an Extended Standard or Extended Graduated Repayment plan. The standard repayment period for federal student loans is 10 years. However, borrowers who meet the requirements can have this period extended to 25 years, lowering the monthly repayment amount. This option can be helpful if the borrower has gone from drawing a salary to having a fixed income.
- Apply for an Income Contingent Repayment (ICR) plan. Under the ICR plan, the monthly repayment may be as low as $5 per month. The monthly payment is dependent on the balance of the student loan debt, family size, and income. Parent PLUS loans must be consolidated in order to qualify.
Options for borrowers with federal student loans in default
Borrowers who have defaulted on federal loans can contact the Department of Education or their collection agency to set up a rehabilitation program. Under the terms of these programs, the borrower arranges a monthly payment and agrees to make nine on-time payments during a 10-month period. Successful rehabilitation will bring the loan back to current status. Rehabilitation may not be available to borrowers who have previously used it.
Defaults can also be reversed through consolidation. Once the loan has been consolidated, the borrower may also be able to pay under an ICR plan.
Borrowers facing Social Security offsets can attempt to appeal them by citing reasons including financial hardship. The Department of Education may then decrease the offset or eliminate it completely.
Options for borrowers with private student loans
If the borrower is having difficulty repaying a private loan, available options depend on the discretion of the lender. For most of these options the lender will require the borrower and co-cosigner to submit financial statements to demonstrate financial hardship.
Ask the lender about the following options:
- Forbearance: Some lenders will offer a period of up to three months.
- Hardship programs to temporarily modify the terms of the loan.
- Extending the repayment term of the loan. For example, the promissory note can be revised to provide for a maximum repayment term of up to 25 years—thereby reducing the monthly payment but increasing the total paid over the life of the loan.
- A temporary interest rate reduction that must be approved by the lender. Once the rate reduction period ends, the lender reviews the financial situation of the borrower and co-signer.
In addition, while the loan is current, the borrower may attempt to refinance the loan with another bank willing to remove the co-signer. This may be possible if the borrower has found a job and built a credit history sufficient to satisfy the new bank that he or she can be solely responsible for the debt.
In some cases, the lender may use a collection agency to pursue payments from a borrower, or sell the debt to a collection agency. If this happens, the borrower or co-signer can see if the agency will offer a settlement on the debt for a lesser amount than what was owed, or arrange a monthly payment plan that is reasonable to both the borrower and the lender. The best-case scenario is that the debt will be substantially reduced and the borrower will be allowed to pay off the lesser amount over a period of time, for example, 48 months.
Preparing for retirement is difficult enough without having to contend with large student loan debt. However, be aware that, whether your clients have government loans or private ones, alternatives exist that can reduce the burden.
Jim Sullivan, CPA/PFS, is a board member of Consumer Debt Counselors Inc., a not-for-profit debt counseling agency. Melissa Towell is a student loan counselor for Consumer Debt Counselors Inc. To comment on this article, email associate editor Courtney Vien.