A report from Guardian Life Insurance Co. revealed that Baby Boomers are the fastest-growing category of student loan debtors. Over half of 54- to 60-year-olds say college debt is preventing them from meeting financial goals, including retirement. Baby Boomers with student loan debt may consider refinancing their loans or exploring employer student loan repayment assistance.
Baby Boomer student debt outpaces all other generations
According to the Guardian report, Baby Boomers experienced a 72% increase in student loan debt over the past five years, the largest increase of any generation. In addition to borrowing, many parents have also spent their retirement savings and depleted their emergency funds to pay for a child’s college education. As a result, many Boomers fear they will be unable to maintain their lifestyle during retirement and/or afford adequate health insurance.
Some Baby Boomers take out Federal Parent PLUS loans, private student loans and private parent loans to pay for their child’s or grandchild’s college bills. These loans typically have higher interest rates and higher fees than federal student loans offered to students. Around 73% of older borrowers cosigned for a private student loan, which means they will be fully responsible for the loan balance if the student doesn’t repay the debt.
Many older borrowers may not realize that if they default on a federal student loan, they risk losing their Social Security benefits. According to a 2016 report from the Government Accountability Office (GAO), nearly 114,000 borrowers age 50 or older had their Social Security disability or retirement benefits offset because of defaulted federal student loans. The federal government may offset up to 15% of Social Security disability or retirement benefits to repay defaulted student loans.
Borrowers who default on private student loans are not subject to Social Security garnishment, but the account may be referred to a debt collector. Lenders may also sue borrowers who default on private student loans or obtain a wage garnishment up to 25%.
How to keep student loan debt from compromising retirement
Baby Boomers may explore the following options to reduce student loan debt:
- Refinance. Borrowers who took out Federal Parent PLUS Loans may refinance the loan through a private lender. The borrower also has the option to transfer the loan to their child so that they are no longer responsible for the debt. Refinancing typically results in lower monthly payments with a lower interest rate, freeing up more money for retirement. Refinancing federal student loan means you will lose the benefits that go along with it – income-based repayments, options for deferments, and the possibility of forgiveness.
- Consider deferment or loan forbearance. Deferment or forbearance allows a borrower to stop making payments or temporarily reduce payment amounts for a specified time period. Federal PLUS Loan borrowers are responsible for paying any interest that accrues during a deferment or loan forbearance. Older borrowers may be eligible for deferment or loan forbearance if they are unable to fulfill their loan obligations due to financial hardships, medical bills or other circumstances acceptable to the loan servicer.
- Switch federal loans to an income-driven repayment plan. Income-driven repayment plans base the monthly payment on a percentage of the borrower’s income, as opposed to the amount they owe. If the borrower’s only income is Social Security benefits, they may have a very low or even zero monthly payment. This can reduce the impact on the borrower’s cash flow. The remaining debt is cancelled after 20 or 25 years of payments.
- Get released from a cosigned loan. Baby Boomers who cosigned a loan for a family member should consider getting released from the loan. In the event the borrower stops paying the loan, the cosigner becomes responsible for the balance. The first step is to contact the lender and apply for cosigner release.
- Obtain a disability discharge. Older borrowers may qualify for a disability discharge if they are totally and permanently disabled. According to the GAO report, almost one-third of borrowers who had Social Security benefits garnished because of student loan debt were able to cancel their debt with total and permanent disability discharge.
- Take advantage of employer benefits. Less than 10% of employers offer college saving or student loan debt benefits, according to the Guardian report. Currently, student loan repayment assistance is treated as taxable income to the employee, but legislation is in place that would give more favorable tax treatment to employer student loan assistance.