6 Ways to Cope When You’re Retiring With Student Loan Debt

A senior citizen carries a heavy student loan payment above his head.
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Student loans aren’t just a young person’s problem. At the end of 2020, borrowers age 50 or older held about 22% of the nation’s $1.6 trillion student debt burden, the AARP reports.

Most of the debt held by 50-plus borrowers is the result of the borrower’s education. But many people have student loans because they took out federal Parent PLUS loans or co-signed a private loan for their child.

If you’re in your 50s, 60s or older and have student loans, retirement may feel out of reach. But there are some ways to deal with your debt — that don’t involve working forever.

6 Ways to Deal With Student Loans in Retirement

To pay down your student loans, you can put all your efforts toward eliminating as much of the balance as possible. Or you can minimize the pain to your retirement budget by keeping your payments low, even if that means you may never eliminate your debt.

Neither one is the right or wrong approach. However, your options will vary based on the type of loans you have. Follow these tips for dealing with student loans in retirement.

1. Avoid Refinancing Federal Student Loans

Refinancing your student loans with a private lender may look tempting. But this isn’t a wise move if you have federal loans, especially when you’re planning to retire.

Your income will probably drop when you retire. When you have federal loans, you’re typically eligible for income-driven repayment plans, which base your payments on your income. (More on these shortly.) Plus, federal loans offer far more relief options than private loans. For example, most federal student loans, including Parent PLUS loans, are covered by an administrative forbearance on payments and interest through Dec. 31, 2022, as part of COVID-19 relief measures.

Forfeiting all that flexibility probably isn’t worth it, even if you can save on interest. However, if you have private student loans, go ahead and refinance if you’ll reduce your payments. You could substantially reduce your interest rate if you’ve improved your credit since you took out the loans.

2. Lower Federal Payments With Income-Driven Repayment

If you have federal loans that you took out for yourself, there are four different income-driven repayment (IDR) plans that you could qualify for. These plans will limit your payment to a percentage of your discretionary income. Your options are:

  • Income-Based Repayment (IBR)
  • Income-Contingent Repayment (ICR)
  • Pay as You Earn (PAYE)
  • Revised Pay as You Earn (REPAYE)

“For all of the income-driven plans, the criteria is that you be on the plan, and you have to make between 20 or 25 years’ worth of payments, depending on which plan it is,” said Betsy Mayotte, president and founder of The Institute of Student Loan Advisors. “They don’t have to be consecutive. Whatever balance is left, including interest, is forgiven at the end of either 20 or 25 years.”

Rather than trying to split hairs over the differences of each, you can use the loan simulator at studentaid.gov to figure out which programs you qualify for and what your payment would be.

In the past, any balance that was forgiven was considered taxable income in the year of forgiveness. But the American Rescue Plan, the stimulus bill that passed in March 2021, includes a provision that makes forgiveness tax-free through Dec. 31, 2025. Obviously, that won’t help someone who’s just starting a 20- or 25-year repayment plan. Mayotte suggests that borrowers hope for the best, while preparing for the potential tax bill.

“They should assume that there could very well be what we’re calling the tax bomb at the end of this, but there’s a possibility that there won’t be and that Congress will extend it beyond 2025,” Mayotte said.

3. Choose Income-Contingent Repayment for Parent PLUS Loans

If you took out Parent PLUS loans for your child, income-contingent repayment (ICR) is the only income-driven plan you’ll qualify for. You’ll need to consolidate your loans first.

Income-contingent plans aren’t as generous as the other income-driven plans. Your payment is based on 20% of your discretionary income. For the other income-driven plans, the cap is 10% to 15%.

4. Pay Off as Much of Your Private Loans as You Can

Unfortunately, your options are extremely limited if you have private student loans. “Private loans have very few, if any, lower payment options or opportunities for relief,” Mayotte said.

The best solution is typically to pay down as much of the balance as you can. Consider whether you could live on a bare-bones budget while working an extra year or two. Putting all your extra cash toward paying down the loans could significantly reduce your payments in retirement, even if you can’t eliminate the balance altogether.

If you don’t want student loans looming over you for decades, this may also be the better approach for federal loans, even if you can lower your payment with an income-driven plan. Keep in mind that even though income-driven plans typically lower your payments, you may wind up paying more over time. That’s because your payments are stretched over 20 or 25 years versus the standard 10-year window.

5. Look Into Student Loan Forgiveness if You Have a Disability

If you have a disability, you could be one of the 323,000 federal borrowers who will receive the automatic student loan forgiveness recently announced by the Department of Education. Borrowers deemed totally and permanently disabled by the VA or Social Security Administration will have their loans automatically forgiven in many cases.

However, even if you don’t automatically receive forgiveness, you could still qualify if you have a disability. If you aren’t notified that your loan has been discharged, you can apply manually and submit a physician certification.

Automatic forgiveness programs also include some people working in the public sector and military personnel and veterans.

6. Have a Tough Conversation With Your Kids

If you took out Parent PLUS loans for your kids, you’re legally liable for that debt. But that doesn’t mean you can’t ask them for help, especially if you’re struggling.

“This can be a really difficult conversation, but if you can’t afford those loans, even at some of the lower payment options, it might be time to have a conversation with the children you took those loans for and have them contribute,” Mayotte said.

What Happens if You Don’t Pay?

You want to avoid defaulting on your student loans if at all possible. Student loans are rarely dischargeable in bankruptcy, so it’s highly unlikely that your debt will go away. However, it’s important to understand what can and can’t happen in case you can’t afford your payments.

The potential consequences include:

  • Having your Social Security benefits garnished. Up to 15% of your Social Security benefits could be garnished and applied to your debt if you default on your federal loans. The first $750 a month you receive is off limits, though. Also, private lenders can’t garnish your Social Security.
  • Losing your tax refund.
  • Having your wages or bank account garnished. Whether your loans are public or private, you could get sued over unpaid student loans. If the lender obtains a judgment against you, they could garnish your bank account or your paycheck if you’re still working.
  • Tanking your credit score. Once your payment is reported as delinquent, the black mark will stay on your credit report for seven years. However, the damage will be most severe in the first two years.

However, you won’t be thrown in jail over delinquent student loan debt. Don’t believe any debt collector who threatens you with arrest. (Note: It’s possible that if you’re sued and you’re summoned to court, you could get arrested if you don’t show up.)

If you can’t afford payments, it’s important to talk to your servicer as soon as possible. You’ll often have some options for federal student loans. While private lenders aren’t required to offer any concessions, it’s often worthwhile for them to allow you to make a lower payment instead of suing you.

Retiring with student loans is doable. But it’s essential to have a plan before you retire and contact your lender immediately when you can’t afford to pay.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].