Dear Penny: I’m 75 With $235K of Student Loans. Should I Default?

An elderly couple go over their finances together while looking stressed out.
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Dear Penny,

I am 75, and my husband is 83. I have been paying on my student loans for 16 years and the balance has gone from $200,000 to $235,000. 

I am on an income-driven repayment plan and work primarily to pay my loans. My IDR payment is $1,056 as of today. I also draw on Social Security. In the event that I default, the penalty is to attach a 15% withdrawal from my Social Security payments, it seems more practical to default and pay only $215 per month versus more than $1,000-plus. Your thoughts?

-J.

Dear J.,

The reality is that you’re never going to be rid of these loans. You probably don’t want to work until the day you die. And even if you did, it’s still highly unlikely that you’d climb out of student debt.

But I don’t think you need to default, which would destroy your credit on top of putting part of your Social Security at risk. The better solution is to get your student loan payments as low as possible and then make the bare minimum payment. That means you’ll need to be OK with seeing the balance creep higher and higher each month. Federal student loans are forgiven upon the death of the borrower, so you wouldn’t need to worry about your husband or anyone else being on the hook for this debt when you die.



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Let me clarify for readers that the advice I’m about to give applies to federal loans only — and since you’re on an income-driven repayment plan, your loans are clearly federal. Unfortunately, those with private loans have far fewer options for relief. Anyone reading who’s struggling with private student loans should contact their servicer to see what options are available.

In your situation, I wouldn’t be making loan payments at all as long as federal student loan forbearance is in effect. Taking advantage of 0% interest rates to knock out as much principal as possible will make sense for some borrowers who plan to pay off their loans in full, especially if they have no high-interest debt. But since your goal should be to make your payments as low as possible, obviously, you’ll want to pay $0 a month for as long as possible.

As long as forbearance is in effect, all those $0 payments still count as on-time payments for income-driven repayment plans. You can contact your servicer to request a refund for any payments you’ve made since March 2020. If any of your student debt consists of private loans, use the refund from your federal loans to knock out as much of the balance as possible.

That’s a short-term fix, of course. As of this writing, forbearance was scheduled to end Aug. 31, 2022. I wouldn’t count on this deadline being extended again. But given that it’s already been extended six times, I certainly wouldn’t be surprised if borrowers get another reprieve, either.

Long term, the easiest solution is to stop working. You’re on an income-driven repayment plan, which means that your payments are capped at 10% to 20% of your discretionary income, depending on what type of plan you’re enrolled in.

It sounds like you earn a pretty decent amount if your payments are $1,056, and I’m guessing you’re paying extra each month. If you retired, your discretionary income would no doubt drop substantially, which would lower your payments as well, since they’re based on income and family size instead of the loan balance.

A family of two living in the lower 48 states with an adjusted gross income of $40,000 could expect monthly payments between $104 and $362. The same family with $100,000 of income would pay anywhere from $604 to $1,362. But retirees who live primarily off of Social Security sometimes wind up with $0 payments. You’ll need to continue applying for recertification each year to keep your loan in good standing.

Under income-driven repayment plans, your remaining student loan balance is typically forgiven after 20 years, though for some plans, it’s only forgiven after 25. You’ve been making payments for 16 years already, so it’s possible that forgiveness is in sight. Historically, forgiven loan balances have been taxable as ordinary income, but under the American Rescue Plan that passed in 2021 for COVID-19 relief, balances that are forgiven through 2025 aren’t taxable. Some observers think it’s possible Congress will eventually make this break permanent.

If you have health conditions that make working difficult, you may want to discuss with your doctor whether you meet the criteria for a Total and Permanent Disability (TPD) discharge. To qualify, you’d need to be permanently unable to work. Many older borrowers meet the criteria but aren’t aware that they qualify. This is one of the rare instances that you’d qualify for full forgiveness if you meet the requirements.

The likelier scenario, though, is that you’ll need to treat these loans the same way you’d handle a chronic health condition. The disease may not have a cure, but you can make the symptoms manageable.

Trying to climb out of debt? Here are 50 ways to bring in some extra money this month.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected]