Student Loan Defaults Can Wreak Havoc on Retirees

No one could have foreseen the convergence of two of the most consequential economic events in our history – the mass migration of the Baby Boom generation into their final life stage and the tectonic shift of a declining global economy.  Unhinged stock market volatility, rising health care costs and historically low interest rates on savings have caused millions of pre-retirees to rethink their plans and their vision, especially as they consider the prospect of having to stretch their retirement income over 25 or 30 years.  As if that weren’t enough, now tens of thousands of retirees are finding that their only real safety net is threatened as a result of their decision to default on their student loans.

That’s right; at least 700,000 student loan debtors are over the age of 65, double the number just five years ago. Nearly 10 percent of these debtors are at least 90 days past due on their student debt payments up from 6 percent in 2005.¹ Unlike most other forms of debt, the federal government will not rest until it receives all of its money. And, because the federal government issues Social Security checks, they can also withhold what they need, leaving many retirees unexpectedly short of cash.

The government can deduct as much as 15 percent from each check until the debt is repaid. With the average monthly benefit being $1,234, that would mean about $200 less in available to meet tight monthly budgets. Needless to say, it can make life much more difficult, especially for retirees living on a fixed income.

The sudden increase in senior student debtors can be attributed to two key factors: In the last couple of decades, parents who wanted to ensure their children had a college education became mid-life borrowers; and many older adults took out student loans to continue their higher education later in life. Student loan defaults among seniors are accelerating as more Baby Boomers are crossing the retirement threshold with very tight budgets. What many of them may not have realized is that student loan guaranteed by the federal government is not dischargeable through bankruptcy.

What Should Senior Debtors Do?

Retirees facing tough decisions about their finances need to consider the long-term consequences of defaulting on student debt. Not only will a default result in automatic deductions from your Social Security check, it will also make it difficult to find employment or obtain financing if either become necessary at some point. It would be better to look for an additional source of income, perhaps through part-time work or even refinancing a mortgage.

Additionally, retirees can also look into the Income-Based Repayment (IBR) program which can reduce your payment or cap it at 15 percent of their income. As long as payments are made on time, the loan balance is forgiven after 25 years.

If a retiree can find full-time employment (30 hours per week) in certain public services, such as a public library, military organization, emergency service, child or elderly daycare, etc., the Public Service Loan Forgiveness (PSLF) will forgive the loan after 10 years of payments. The PSLF program can be combined with IBR to keep payment low.

Lessons Learned

The unfortunate position of these retirees should provide valuable lessons for mid-life adults considering taking on student debt, either for their children or for their own continuing education. Parents especially should consider the viability of financing their children’s college education. Early planning and savings are the obvious solution for parents who are intent on sending their children to college; however, for parents who aren’t financially prepared, other options, such as community colleges and less expensive, and local public colleges can provide a quality education without the added financial stress.

¹http://www.asa.org/site/assets/files/3680/retirement_delayed.pdf

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