The Ultimate Guide To Student Loan Debt Over 60
You have student loan debt, and you’re over 60. Can you retire? Is it even possible? Those are questions more and more older Americans are facing as they enter their retirement years.
First of all, they’re borrowing more. Both parents and grandparents are going into debt to finance their children’s and grandchildren’s college educations.
Americans ages 60 and older now represent the fastest-growing segment of the student loan market. Collectively, they owe a $86 billion in outstanding student loans. Those ages 50 to 60 owe a staggering $219.4 billion. And unlike credit card debt, student loan debt isn’t dischargeable in bankruptcy – short of death or total disability. And we don’t recommend that.
The extent of the problem
The problem of student loan debt among older Americans is spilling into other areas of the economy: According to a recent survey by the AARP and the Association of Young Americans:
- 31 % of baby boomers and 38% of Gen Xers now entering their 50s say that student loan debt has forced them to stop saving for retirement. This makes any payments left over on student loans that much less affordable once they leave the workforce.
- 32% of baby boomers and 26% of Generation X respondents say that student loans have prevented or delayed them from buying a home – siphoning off still more wealth that would otherwise have taken the form of home equity, which can be converted into income that may help pay student loans in retirement.
- 16% of Generation Xers and 9% of Boomers say student loan debt has forced them to put off a home purchase. In a 2015 report, the Consumer Finance Protection Bureau found that 37 percent of student loan borrowers age 65 and older had actually defaulted. That put their Social Security benefits at risk because Student loan companies can have the Social Security Administration garnish up to 15 percent of Social Security benefits in order to pay off defaulted student loans. In fact, more than 40,000 seniors are already having their Social Security benefits garnished to pay off student loans.
- The number of older student borrowers quadrupled between 2005 and 2017.
What to do about it
So what can you do? The answer depends on your situation and the nature of your student loan obligation. Those from about age 40 and up will generally fall into three categories, with some overlap:
- Former students who owe student loans directly for their own education;
- Those who took out Parent PLUS loans to help their children pay college costs;
- Parents who co-signed loans for their children.
Additionally, you can further subdivide the first and third categories into federal loans and private loans. Tactics and strategies for student loan management for older Americans can take on a number of forms:
- Get the kids to refi the PLUS loans and cosigned loans in their own name as soon as they get their first job (the preferred solution, for most).
- Enroll in an income-driven repayment program, and manage your earnings to make your adjusted gross income look as low as possible and play the long game.
- Refinance your loans at a lower interest rate.
- Get the primary borrower into the Public Service Loan Forgiveness Program and gun for a 10-year Jubilee.
- Have lenders drop you as a cosigner altogether after 32-36 months.
- Get approved for Social Security Disability payments.
- Die an honorable and untimely death (least recommended).
Here’s a look at each.
1.) Have the kids refinance your Parental PLUS and co-signed loans in their names.
This is an excellent solution for most because it’s your children receiving the most benefit from their own education. Especially with the bump in income that those with a 4-year and graduate degrees have compared to those without. The difference is more than enough to cover the average student loan payment. The median weekly earnings of full-time workers with a bachelor’s degree were $1,189, at the close of 2016. This is significantly more than the median weekly earnings of a high school graduate with no college, $718. Those with some college or an associate’s degree earned a little more: $799 per week, on average.
Bachelors’ degree holders earn an average of $471 more than workers with a high school diploma every week. They also earn $390 per week more than workers with some college or an associate’s degree. That more than makes up for the median $222 student loan payment. Furthermore, that student loan payment eventually goes away. The earnings advantage doesn’t. In fact, earnings tend to increase over time.
The average baccalaureate earns $24,492 per year more than the average worker with just a high school diploma. He or she also earns $20,280 more than the average worker with just some college or an associate’s degree. So don’t feel guilty: It’s the kids earning the extra money as a result of the education you made possible by taking out a PLUS Loan, or by cosigning a loan. You’ve got retirement to worry about, and no one’s going to give you a loan to fund your retirement. The sooner you can have the kids take the responsibility for their college-related debt, the better.
2.) Enroll in a federal student loan income-driven repayment program, manage your earnings to make your adjusted gross income look as low as possible and play the long game.
The income-driven repayment piece. The government sets your maximum monthly payment at a set percentage of your discretionary monthly adjusted gross income, over and above 150% of the poverty line for a family like yourself. That term, adjusted gross income is key, as we shall see.
What is 150% of the poverty level?
The Department of Education bases all income-driven repayment plans except for ICR on a percentage of the poverty threshold according to the Department of Health and Human Services. Income above those floors is what the Department of Education considers to be discretionary income.
As of 2019, 150% of the poverty line for the 48 contiguous United States, including the District of Columbia, is as follows:
- Single, no children: $18,735
- 2-person household: $25,365
- 3-person household: $31,995
- 4-person household: $38,625
- 5-person household: $45,225.
The four income-driven repayment plans
Here are the four main income-driven programs and how they repay
- Income-Based Repayment (IBR) – 15% of discretionary income;
- Pay As You Earn (PAYE)- 10% of discretionary income;
- Revised Pay As You Earn (REPAYE) – 10% of discretionary income;
- Income-contingent repayment (ICR) – 20%, but calculated on a less advantageous 100% of the poverty line, rather than 150% .
So if you’re on the ICR plan, your payment cap would come out to 20 percent of your income over these thresholds:
- 1-person household: $12,490
- 2-person household: $16,910
- 3-person household: $21,330
- 4-person household: $25,750
- 5-person household: $30,170
Income-driven repayments are going to be much higher under ICR than under the other income-driven repayment options. But they still qualify for forgiveness if there’s a balance left over at the end of the repayment period. And loans are discharged at your death. They don’t follow you into the grave, which is taken out of your children’s inheritance (via probate), as is the case with most private loans.
If you have a Parent PLUS loan, ICR might be your only option – but you’ll have to refinance into a direct consolidation loan first. Parent PLUS loans don’t qualify for any income-driven repayment plans directly.
But it may be better than nothing unless you have a pretty high income. Everyone else, you should try for the PAYE or the REPAYE program. Nobody other than former PLUS loan borrowers who have taken out a direct consolidation refi should be on ICR.
Maximizing Loan Forgiveness Programs
Whether you’re working towards a 10-year loan forgiveness program or a 25-year loan forgiveness program, the key to making the math work for you is to keep your taxable adjusted gross income looking as low as possible. The key to maximizing the benefit of early loan forgiveness programs.
And here’s the trick: Not all income is taxable adjusted gross income. Some types of income of tax-free, only partially taxable, or not considered income at all.
To keep your student loan payments down for a little while, some planners may suggest keeping your income from taxable sources down until your loans qualify for forgiveness. Instead, reduce your AGI by relying more on tax-free and tax-advantaged sources of income.
Examples of tax-free income
- Income from Roth IRA accounts and Roth 401(k) designated accounts.
- Social security income – if your total income is below $25,000 (single filers) or $32,000 (married filers) as of 2019.
- Income from municipal bonds (except for certain private activity bonds if you are subject to the alternative minimum tax).
- Dividends from life insurance policies;
- Loans from life insurance policies;
- Income from reverse mortgages;
- Other loan proceeds;
- Proceeds from investment assets sold at a loss;
- Proceeds from the sale of a personal residence, up to $250,000 (singles) or $500,000 (married people filing jointly).
- Gifts (up to $15,000 per year per giver).
Examples of tax-advantaged income
- Annuity income (only partially taxable);
- Social Security Income (either 50% or 80% taxable over certain income thresholds);
- Income from non-deductible IRAs (only partially taxable, similar to annuities);
- Interest from personal savings in taxable accounts (already taxed), so only interest and capital gains is taxable.
Capital gains income is included in your AGI, though gains on assets held for longer than a year is taxed at a lower rate.
Keeping your AGI down – at least temporarily – can have other benefits, too:
- It gives tax-deferred retirement accounts that much longer to “cook,” and compound on your behalf.
- May help you qualify for other deductions
- It may help you avoid taxation or reduce taxes on Social Security income
- Potentially reduced Medicare premiums.
- Helps avoid getting bumped into higher marginal income tax brackets – meaning higher tax rates on a portion of your income.
- Avoids incurring the 3.8% investment surtax on incomes over $200,000 (singles) or $250,000 (married couples filing jointly).
The greater your expected repayment is as a percentage of your income, the more benefit you will get from these strategies. ICR borrowers (typically former PLUS loan borrowers who have refinanced into a direct consolidation loan) will benefit the most per dollar reduction. But all federal borrowers can potentially benefit from careful management of the nature and timing of their income.
How To Reduce Your AGI for Student Loan Purposes
So how can you keep your AGI down to minimize your required student loan payments (and maximize eventual 10-year (PSLF) or 25-year loan forgiveness?
- Don’t take distributions from tax-deferred retirement accounts until the first quarter of the year after the year in which you turn age 59 1/2.
- Unless your income is below the Social Security benefit taxation threshold, wait until you reach full retirement age to take your Social Security benefits. (If you’re in poor health, severely overweight or you’re a lifelong smoker, your shortened life expectancy may change this equation.)
- Maximize contributions to IRAs, 401(k)s, SEPs, and/or SIMPLE IRAs.
- Start a business and invest in it, and keep reinvesting profits in the business, expecting to reap the payoff sometime after loan forgiveness. Business investments are tax deductible, and business investments reduce your Schedule C income.
- If you have access to a high-deductible health plan (HDHP) via your employer, maximize contributions to your health savings account (ACA).
- Consider drawing down non-taxable income sources, like Roth IRAs. Normally, planners often recommend letting tax-free accounts compound as long as possible. But if you have a big student loan payment on a loan that may qualify for forgiveness in a few years, you may consider living on tax-free accounts for a little while. This preserves your tax-deferred IRAs, 401(k)s and annuities as well as Social Security income for after your student loans are forgiven.
- Take advantage of non-qualified executive compensation plans and salary deferrals.
- Use your home for business purposes. If you can set aside a portion of your home or apartment exclusively for business use, you may be able to deduct a portion of your rent, mortgage, utilities, and internet bill, depending on the circumstances. Under the new tax law, you pretty much need to be self-employed or own your own business to claim this perk. It’s much tougher for employees. But it still may be worthwhile for 1099 recipients and business owners, and can meaningfully reduce your AGI.
- Buy one or more fixer-upper rental properties. Let’s take a closer look at this strategy below.
The passive activity loss strategy
If you own rental real estate, you may be able to reduce your AGI by up to $25,000 per year.
Here’s how this works:
The IRS allows rental real estate owners to deduct up to $25,000 in passive activity losses.
If your income is below $150,000 per year, you can deduct losses from passive activities.
So if you have student loans coming up for forgiveness within a few years, you may want to make some big repairs or capital investments – even if you don’t expect to recoup the investment right away. You can still take the tax deduction, up to $25,000 depending on your other income. This deduction may help you lower your AGI – and consequently reduce your student loan payment.
By how much? Let’s say you’ve got a big Parental PLUS loan and you’re enrolled in an income-contingent repayment plan (ICR). The Department of Education fixes your payment at 20% of your discretionary income for the previous year.
If you can deduct $25,000 from your AGI thanks to a passive activity loss from your rental properties, you may be able to reduce your ICR student loan payments by $5,000 per year (20% times $25,000.)
Divided by 12 months, that’s a reduced payment of $416.67 per month, all year long.
It’s not worth making dumb real estate investments that take a long term loss just for tax purposes. But if you have one or more student loans that will soon qualify for forgiveness, and you’re on an income-driven repayment program, making prudent real estate investments can help you drive down your individual AGI, thereby lowering your student loan payments and increasing the student loan amount that will eventually qualify for forgiveness.
The idea is to take up to $25,000 in paper losses for a temporary period while you are still paying off your PLUS loans. Meanwhile, you’re still building up equity in the rental property and setting it up for rental value increases that will benefit you later. Then after your loan is paid off or forgiven and the increased income won’t count against you.
Now, you can’t deduct everything in the first year. The IRS differentiates between repairs that are simply designed to get the property to be useable – and capital improvements. Passive activity loss rules are notoriously complicated – as are deduction and amortization rules for capital investments. You should seek the services of a qualified tax professional to help you with this kind of planning.
3.) Refinance your college loans at a lower interest rate.
If you have solid credit, you may be able to refinance your loans with a private lender at a significantly lower interest rate. You can refinance federal and private loans you took out for your own education, as well as any Parental PLUS loans.
The idea: The lower interest rate should help you:
- Lower the monthly payment
- Pay the loan off faster
- Reduce the overall interest you pay over the life of the loan, OR;
- Some combination of the above.
But refinancing any kind of federal student loan has some disadvantages, too:
Once you refinance, unless these perks are written into the new loan agreement, you lose eligibility for the following rights and benefits:
- Income-contingent repayment (ICR);
- The Public Service Loan Forgiveness Program;
See our article Read This Before Refinancing Your Federal Student Loans before you commit. Once you sign the contract and the loan company cuts the check, the refinancing decision is irreversible.
Who would benefit most from this strategy?
Basing your long-term strategy on refinancing into a low-interest private loan rather than working the federal loan system is best suited if one or more of these circumstances apply:
- The borrower is not a public service employee or plans to leave public service within the first ten years;
- The borrower’s income is too high for Income-Driven Repayment plans to meaningfully reduce the monthly payment and that circumstance is likely to continue.
- The loan will be fully paid off within 25 years anyway, even with income-based repayment (ten years for public service employees);
- You have good credit and can get a very low rate;
- Interest rates have fallen substantially since you took out the loan.
- You want the option of eventually discharging the loan in bankruptcy: Federal loans cannot be discharged except in the event of total disability, or where repaying them would present an undue hardship on you and your dependents.
4.) Get the primary borrower into the Public Service Loan Forgiveness Program PSLF.
The Public Service Loan Forgiveness Program (PSLF) gives college graduates an incentive to work as public employees or in non-profit organizations that may have lower salaries than for-profit employers. Work full-time for a qualifying government or tax-exempt/charity employer for ten years and you may get the remaining balance forgiven – tax-free.
The program is only a little over 10 years old itself, so relatively few people have qualified for forgiveness yet. But the floodgates will soon open, and many people will soon see tens of thousands or even hundreds of thousands of dollars in student loan balances forgiven under this program.
This program is particularly valuable for physicians and dentists, many of whom have huge student loan balances and work for the government or non-profit organizations. It will also benefit a lot of teachers, nurses, social workers, and other human services workers. But you don’t have to be in a human services profession: This strategy works no matter what your degree is in and no matter what you do for the public service organization. You can be a computer technician, marketing rep, public relations person, janitor – it doesn’t matter. All you have to do is show that you worked at least 30 hours per week for a qualifying public service organization for ten years.
It’s the income-driven repayment piece, combined with the relatively short ten-year timeline for forgiveness, that really makes this strategy work.
However, the borrower must keep records of his or her employment, and must enroll in one of the eligible repayment plans:
Note: The following plans do not qualify for PSLF:
- Income-Sensitive Repayment Plan
- Extended Repayment Plan
- Graduated Repayment Plan
- Standard Repayment Plan
For PLUS Loans, to qualify for PSLF, you’ll have to refinance them via the William D. Ford Direct Loan program (i.e., a direct consolidation loan), and then make sure you are enrolled in an income-contingent repayment plan for the 120 months.
5.) Get the lenders to drop you as the cosigner after 24-36 months.
According to the Consumer Finance Protection Bureau, more than 50% of student loan cosigners are age 55 or older. If you cosigned some loans with your kids, that’s not necessarily a forever arrangement. Once your children have good credit on their own, many lenders will consider dropping you as a cosigner on the loan after two- to- three years.
This gets the loan off of your credit report, though it won’t remove the payment history.
Getting the loan off of your report may help you free up credit for other purposes, such as getting a mortgage to buy a rental property to realize some passive activity losses on!
To be successful, your child needs to have good credit and be able to show enough income to handle the payments on his or her own. Nearly all lenders will require at least 24 to 36 months of on-time payments before they will consider removing a cosigner.
You can find more details on getting a student loan cosigner release here.
6.) Qualify for Social Security Disability Benefits.
Yes, health tends to decline as you get older. If this is happening to you, and you can’t work as a result of your disability, you may qualify to get your student loans discharged.
For private loans, this may occur during the normal bankruptcy process.
For federal loans, you need to go through the Total and Permanent Disability discharge process. This isn’t easy – the standard is high. Many applications for SSDI and SSI fail, and the approvals take many months to complete. But you may be able to get a physician to sign off on a disability – especially if you are older.
How to apply
Here are the three ways to qualify for the discharge of a federal student loan obligation due to disability:
- Veterans: You can get documentation from the VA showing that you have received one of these two types of VA disability determinations:
- A determination that you have a service-connected disability (or disabilities) that is 100% disabling, OR;
- A determination that you are totally disabled based on an individual unemployability rating. The disability must be service-connected. If your disability isn’t service connected, you can’t go the VA route.
- Have your physician fill out Section 4 of this form, documenting that you cannot engage in gainful activity as a result of your disability or disabilities, and that your disability has persisted for at least five years, will persist for at least five years into the future, or can be expected to result in death.
- Submit a notice of SSDI or SSI benefits award from the Social Security Administration. A copy of your notice of award or Benefits Planning Query (BPQY) from the SSA. You only qualify for a discharge if your next scheduled disability review is 5 to 7 years or more from the date of your last SSA disability determination.
If you want to submit a BPQY, but do not have one, contact the SSA office that issued your award and request form SSA-2459. You may also request a BPQY by calling 1-800-772-1213 or by visiting www.ssa.gov.
Note: Student loan debt forgiven due to disability or death is now tax-free, under the Tax Cuts and Jobs Act.
7.) Discharge at death
Generally, federal loans are dischargeable upon the death of the borrower. This includes Parental PLUS loans, which are forgiven upon the death of either the parent or the child. However, if both parents are the signatory on the PLUS loan, then the debt is not discharged until the death of the second parent.
With private loans, you need to check the fine print on the original loan document. Some loans have a built-in discharge at death (that you pay for with a somewhat higher interest rate). If they don’t, then the lender gets to submit a claim against your estate during probate. The courts will distribute assets to creditors before they release any money or assets to your heirs.
If you are a co-signer on a private loan for your children, the lender may demand immediate payment for the loan. So try to leave enough to repay the loan in liquid assets or in life insurance.
Jason Van Steenwyk is an experienced financial industry reporter and writer. He is a former staff reporter for Mutual Funds, and has been published in SeekingAlpha, Nasdaq.com, NerdWallet, Value Penguin, RealEstate.com, WealthManagement.com, Senior Market Advisor, Life and Health Pro and many other outlets over the past two decades. He is also an avid fiddle player and guitarist. He lives in Orlando, Florida.