Are Guarantees of Student Loans Changing The Retirement Landscape?
If you think student loan debt is a problem for the younger generation, think again. According to the Consumer Financial Protection Bureau (CFPB), about 2.8 million people age 60 and older have outstanding student loans – four times the number in 2005. Most of the current student-loan debts of people 60-plus were incurred paying for college for a child or grandchild, and in the past decade, for the 60 to 64 age group, student-loan debt has increased eight-fold – to $38 billion!
“Americans in their 60s are now the fastest-growing age group facing student loan debt,” says Andrew Anable, a financial planner at Safeguard Investment Advisory Group in Santa Barbara, California. “It is a serious problem for many who are in retirement or approaching it.”
Mr. Anable shared these four steps baby-boomer parents should take if they are dealing with – or considering taking on – their kids’ student-loan debt:
• Attack the debt: Start an aggressive payment plan because a higher monthly payment may be worthwhile in the long run. Imagine someone has a $35,000 student loan with 7 percent interest. They may want to take a 30-year payment plan instead of a 10-year plan, because it’s going to lower the monthly payment by $170. But at what cost? Paying over 30 years is going to cost thousands more in interest. I suggest checking a student-loan calculator for payment terms. CFPB reports the average amount of student loan debt for people 60-and-over is more than $23,000.
• Be careful about co-signing: Over half of co-signers on outstanding student loans are 55 and over. With students struggling to make payments, parents or grandparents are on the hook if they co-signed – a bigger problem if they’re near or in retirement with a fixed income. Many people who co-sign don’t realize they’re responsible for the debt if their kid doesn’t pay. It’s OK for you not to co-sign for the kids. It sounds harsh, but the kids need to know this can impact your retirement as well as your credit. One easy guideline is: For your kids’ college, don’t borrow more than half your annual income.
• Make retirement a priority: Whether you choose to help your kids or not, your retirement needs to be a priority. A good rule is putting 10-15 percent a year into your 401 (k) or retirement plans. Earmark it for your future, and it should not be touched early for you or for your kids.
• Do not default: Lapsing in payments can lead to garnishment of Social Security checks. In 2015, more than 12 percent of 60-and-over borrowers were in default. Income-driven repayment plans can be an option to reduce monthly payments. If you miss a payment, aim to resume payments or renegotiate the terms of the loan as soon as you can.
**Update: Stay tuned. Aging parents and grandparents may have an out. In the years to come, many seniors may begin to qualify to have student/parent debts discharged in bankruptcy. As the incomes of seniors decrease as they enter retirement, there may be a higher likelihood that they will not have sufficient income meet obligations beyond their living expenses. In these cases, they may be eligible to have their parent loans and student loan guarantees discharged in bankruptcy.
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