If you’re eligible for AARP and owe more than $100,000 in student debt, how in the world are you supposed to enjoy a secure retirement? While the student loan crisis has hit the Millennial generation hardest, very few people are talking about the severe strain that happens when you have student loans over 50 years old.
Seniors are borrowing for more than just their children too. You can take out loans yourself for a second career. You might borrow to go back to graduate school to get that master’s degree you always wanted. Of course, many older Americans took out a bunch of Parent PLUS loans with the Department of Education for their children’s college education because of financial shock from the Great Recession.
Regardless if you’re on the hook for student loans for your child’s education or yours, there is a massive dearth of good information for what to do with student loans over 50. Luckily, our team of CFPs and CFAs has come up with five strategies that could be absolutely game-changing.
How many student loan borrowers over 50-years-old owe monster debt?
Check out the following stats from the Federal Student Loan Portfolio based on age and debt size.
Number of Borrowers Age 50 to 61
Number of Borrowers 62+
$100,000 to $200,000
Hence, about 890,000 federal student loan borrowers over the age of 50 owe six figures of student debt as of September 30, 2020.
Pretend you’re on the very bottom end of that debt range, with $100,000 of student loans at a 7% interest rate. You’d need to pay $1,161 a month for 10 years just to get to $0 debt.
Of course, if you’re above 50 years old, you are probably behind on retirement savings. That’s why the federal government gives you a $6,500 (for 2020 and 2021) catch-up contribution in your employer retirement accounts.
If you borrowed heavily for school, you are probably middle class. You don’t have enough money to pay student loans and save adequately for retirement too. So what do you do?
Tip 1: Structure your student loans in an optimal way
First, let’s talk about what to do if you have Parent PLUS loans. If that’s all you owe (i.e. you have no remaining balance for your own education), you need to consolidate this federal student loan debt into a Direct Consolidation Loan for Parent PLUS loans.
If you’re not planning on getting the 10-year tax free forgiveness of the Public Service Loan Forgiveness (PSLF) program, I’d send the consolidation loan to Great Lakes. They have the best customer service scores of any loan servicer. Otherwise, I’d send it to FedLoan Servicing since they’re the only PSLF servicer.
You get to choose what servicer to work with when you consolidate, so take advantage of that.
Why consolidate Parent PLUS Loans?
If you leave your Parent PLUS loans alone, then you will not be able to pay based on your income. If you owe student loans over age 50 and you have six figures, you need all the tools in your toolbelt you can find.
Consolidation with the government does not affect the interest rate, and your debt burden gets more payment plan options.
For Parent PLUS, you only have ICR or Income-Contingent Repayment. This plan takes 20% of your adjusted gross income (AGI) minus the federal poverty line for your family size.
While that sounds like a lot, we’ll show you how that option can be a game changer.
What if you owe Stafford, Grad PLUS or Private Loans?
Stafford or Grad PLUS loans are your liability for your own education.
If you consolidate Parent PLUS, you want to make sure that they stay completely separate from your other federal debt. Otherwise, you could lose access to student loan repayment plans that only ask for 10% of your discretionary income instead of 20%.
If you have no credit towards loan forgiveness, I’d suggest consolidating your non-Parent-PLUS loans first separately, then doing another consolidation of your Parent PLUS loans.
However, if you have already built up forgiveness credit, you might want to still consolidate if the loans are FFEL (usually from before 2010). If you have Direct loans, you don’t need to consolidate them.
Student loans with private lenders always need to be refinanced if you can find a lower interest rate. You can thousands in total interest over the life of the loans simply by refinancing anytime a lower interest rate is available.
You want Direct loans
The goal is to restructure the loans to Direct Federal Student Loans. This kind of debt has the best repayment options. It also allows you to pursue loan forgiveness easier.
With this debt structure, you might also be included in any future federal loan reforms that could help you.
The only kind of debt you always need to get rid of before retiring is private student loan debt. The federal kind can be managed even after retirement.
Tip 2: Max out all your retirement accounts over everything else
Vanguard found in a 2018 study that only 13% of employees maxed their 401k accounts.
When you are over age 50, you get an additional $6,500 you can contribute on top of the $19,500 everyone else can put in.
That means as an employee over 50 years old, you could contribute $26,000 to retirement. If you’re married, your spouse can contribute the same if he or she is also employed and covered by a retirement plan.
To show how a couple could drastically reduce their student loan payment, let’s assume Tim and Tracy owe $150,000 of Parent PLUS loans and earn $100,000 per year.
If they save $0 in retirement, their payment under ICR would be their AGI minus 100% of the federal poverty line ($17,420 for 2021) times 20%.
That monthly payment would be 20% *($100,000-$17,420) / 12 = $1,376.33.
Whereas, the 10-year Standard Repayment Plan payment would be $1,742. Since the difference isn’t huge, Tim and Tracy might be tempted to just refinance the debt and work until it’s gone.
However, if they both maxed retirement, their payment under ICR would be 20% * ($100,000-$52,0000-$17,420) /12 = $509.67.
They get a federal and state income tax break on contributions. They also get a 20% break because of their Parent PLUS loans. In this circumstance, the payment difference allows them to save aggressively for retirement.
Note that if the loans were Grad PLUS or Stafford, Tim and Tracy would be eligible for payments that would be 10% of income with a higher deduction of 150% of the federal poverty line instead of 100%.
Clearly, if you’re a senior citizen student loan borrower, you need to be focusing on your own retirement savings over paying down your student loans.
Tip 3: Use forbearance strategically
Let’s say that even after saving for retirement, you still have to make monster student loan payments because your income is very high. You plan on living off your Social Security and modest retirement savings after paying off your mortgage.
In that case, you might have the highest payments on your student loans ever in the last few years you work since payments are calculated on income.
You get up to three years of forbearance on student loans if you’re experiencing a financial hardship.
Your servicer must approve you for them, but in my experience, the servicers will approve most cases if you ask.
That means you could potentially delay payments now that would be substantially higher compared to what they would be in retirement. With the extra money you’re keeping, you could pay down other kinds of remaining debt or build up an emergency fund.
Of course, forbearance compounds your interest. If you plan to pay down your loans, this is a bad strategy. In fact, if you owe less than $50,000, you should probably refinance your loans.
However, when your debt-to-income ratio is above a certain level, you should start thinking of your student loans as a tax obligation rather than a debt obligation. You can make payments that are a percentage of your income on federal debt. That allows for lots of strategizing on how to reduce that tax payment.
Tip 4: Spend assets first and delay claiming Social Security
Here’s a massive hack for student loan payments over age 50 that financial planners are clueless about.
Your Social Security is taxable so long as your Modified Adjusted Gross Income (MAGI) is above certain levels.
However, only half of Social Security income gets included in MAGI.
For example, if you’re married and your MAGI is below $32,000, your Social Security gets a 0% tax rate.
That means you could make up to $64,000 of only Social Security income, and none of it would be taxable (since only half of the benefits go into MAGI).
Your Social Security income is not supposed to go into AGI anyway, but if it’s excluded from your combined income, you can feel doubly comfortable the loan servicer won’t be able to include it into what’s required for your student loan payment amount.
That means Social Security benefits are incredibly valuable as an income source that’s not “taxed” for student loan payments.
Of course, that means you should want the biggest benefit possible. That means waiting until the age of 70 when your Social Security is maximized.
However, according to the Center for Retirement Research, only 4% of women and 2% of men wait to claim at age 70.
Examples of how you could benefit from delaying Social Security
If your benefit at the full retirement age of 66 would be $2,000 a month, you could increase that by 32% if you waited until 70. In other words, the benefit would be $2,000*1.32 = $2,640 per month instead.
If two middle-class retirees, Bob and Clayton, waited until 70 to claim they’re $2,640 per month benefit, that total income combined would be $63,360. Since half that amount is below $32,000, the entire income would be non-taxable.
If they had federal student loans and Social Security was their only income source, their payment would be $0 per month.
What if they wanted to retire before 70 years old? That’s why you need them to have huge assets in retirement accounts. If they retire at 65, they could use Medicare for medical insurance needs and spend down the assets they aggressively put away when they read this blog post and started maximizing their retirement accounts.
Hence, if they had only $200,000 of assets, they could probably make that last five years or so before the money runs out. At that point, they’d rely on juiced Social Security payments.
Even if they had $200,000 of federal student loans with a net worth of 0, this couple could retire in their mid-60s instead of working until they’re six feet under.
Hence, any borrower with huge student loans over 50 years old should focus on having enough money to retire and spend it all until claiming Social Security at 70.
Tip 5: Utilize special strategies for student loan forgiveness for seniors citizens and borrowers over 50
While it sounds great to pay as little as $0 per month on federal student loans, there’s got to be a catch you must be thinking, and there is. Unless your forgiveness is under the generous PSLF program, you must pay income taxes on the forgiven debt after 25 years of payments.
Income-driven plans allow forgiveness after 20 years, but realistically you’ll want to draw it out as long as possible if your debt-to-income ratio is very high.
If you start making payments on your federal loans in your 50s or 60s, that means in 25 years when the debt could be forgiven, you could be facing a six-figure tax bill in your 80s or 90s. Here are some strategies for managing that.
How to get payments of $0 per month on your student loans as a senior citizen
We showed you how maximizing Social Security is key to getting payments as low as $0 on your student loans as a senior citizen.
You might think the student debt compounds on you if you’re paying nothing. However, this is not the case. The interest grows at a linear rate because of the difference between accrued and compounded student loan interest.
That means your tax bomb payment will be much lower than you expect, even if it’s unlikely you’ll have to pay it.
Dealing with the tax bomb from loan forgiveness
Consider a case where Janae and Terrence have $150,000 of Parent PLUS loans and only $20,000 of taxable income because they’re primarily living on Social Security.
They start making income driven payments at 70 after realizing they were on the wrong plan.
Here’s what the cost would look like assuming a 7% interest rate, 3% inflation, and a family size of 2.
Parent PLUS (25 Year)
Balance at Forgiveness (2044)
Tax Due in 25 Years (40% Rate)
Present Value of Total Cost (2019 Dollars)
Year Loans are Paid Off or Forgiven
First Monthly Payment
Tax Penalty Monthly Savings
While it would be concerning, to say the least to have to pay $153,000 in taxes to the IRS in 25 years at age 95, it’s something Janae and Terrence shouldn’t worry about.
Even if they did have to pay the debt, the present value (cost in today’s dollars) is only about $61,000. That’s an amazing result when they owe $150,000.
Their first monthly payment would be only $66 a month.
If they wanted to save for the tax bomb, they could put $283 a month into a brokerage account. They’d have enough in 25 years to cover the tax bomb that way.
If they pass before 95, the debt is forgiven tax-free. However, it will probably be forgiven tax-free anyway.
Insolvency exclusion could help
The IRS has something called the insolvency exclusion. I call this the “don’t kick a man while he’s down” rule.
Basically, if your total liabilities are greater than your assets, the IRS does not tax your forgiven debt.
If you owed the amount we showed above ($383,000), you probably owe more than you have in assets. In that case, as a 95-year-old your debt would be discharged tax-free under current rules based on my guess of how the IRS would interpret this.
Disability discharge for 90-year-olds with student loans
If the IRS did not discharge the tax on forgiven debt, one strategy would be to hire a student loan attorney like my friends Adam Minsky, Jay Fleischman, or Josh Cohen.
In conversations with them, we feel like you could make an argument that a 90-year-old is disabled and thus would be eligible to have his or her loans forgiven tax-free thanks to the disability discharge.
Use common sense and imagine how the IRS will come after a broke 95-year-old in a nursing home who’s living there with Medicaid subsidies. I’m not saying any of this is great public policy. It’d probably be better if there were more restrictions on the institutions handing out the debt like candy in the first place.
However, this is the system we’ve got, not the one we’d wish for. That means you should probably be able to avoid the tax on forgiven debt at an advanced age.
The most realistic risk from pursuing this strategy is forgetting you have student loans or losing the ability to send this stuff in on your own.
That’s why you should add an authorized agent on your account. Great Lakes seems to be the best for this.
The idea is that if you lose your marbles in your 80s, your child, a paid representative, or friend could send in your paperwork for you to certify your low income driven payment. That way you can avoid the fate of thousands of people who have their Social Security garnished to pay their student loans.
The real challenge for a borrower over 50 years old with student loans is being able to budget for a comfortable but limited income in retirement.
Many Americans live off Social Security income almost exclusively in their older years. I remember visiting mobile home communities for seniors on church choir tours in South Florida years ago. The quality of life seemed pretty good from chatting with residents. These people were mostly working-class folks who lived off pensions or Social Security.
When you realize how few people wait to claim much higher Social Security benefits, you should be able to budget according to your monthly benefit.
Are you taking a risk by spending down all your assets and depending on Social Security? Of course. You’re also taking a risk by delaying retirement for years when you might not need to. You only get to live once.
Make a plan if you have student loans over age 50
If you read all this and are overwhelmed, we’re the leading experts in the country on how to strategically manage six-figure student loans over the age of 50.
Reach out to us and get a custom plan for a fair, one-time flat fee that might allow you to retire years sooner than you dreamed possible.
Structure your loans as direct federal student loans, max out your retirement at $26,000 per year, utilize forbearance strategically, delay Social Security and spend down your assets, and consider forgiveness or loan cancellation strategies especially suited to seniors.
What kind of things are you going through right now as a borrower with student loans over 50 years old? Comment below!